Accenture Results: Revenue Beats Expectations But Growth In New Bookings Disappoints

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Accenture

Accenture (NYSE:ACN) reported its Q2 FY 2015 results on March 26th, and the results exceeded market expectations as the company posted nearly 5% year-over-year growth in revenues to $7.49 billion (12% growth in local currency). (Fiscal years end with September.)  This was at the higher end of the company’s guided range of $7.25 billion to $7.50 billion. In our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the second quarter. Furthermore, we also expected consulting revenues to register growth, albeit at a slower pace. The results were in line with our expectations, as outsourcing revenue grew 13% year over year in local currency to $3.65 billion, while the consulting business revenues grew 11% year over year to $3.84 billion. During the quarter, the company reported new orders worth $9.4 billion. [1] However, the slower growth rate in new signings indicates the underlying softness in demand for IT services, and will impact Accenture’s revenues in future quarters. In this note, we will review and analyze Accenture’s earnings.

See our full analysis for Accenture

Guidance For FY15 and Q3

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Accenture raised its full-year revenue growth forecast for the second time. It now expects net revenue growth in local currency to be in the range of 8% to 10%, compared with 5% to 8% previously. It now expects diluted GAAP EPS to be in the range of $4.61 to $4.71, including the positive impact of its increased revenue outlook, which is offset by the negative impact of its revised foreign-exchange assumption, as well as the negative impact of a settlement charge. Excluding the settlement charge, adjusted EPS is expected to be in the range of $4.66 to $4.76. The company’s previously guided range for EPS was $4.66 to $4.80. Furthermore, Accenture is now targeting new bookings for fiscal 2015 in the range of $33 billion to $35 billion, compared with $34 billion to $36 billion previously. For Q3, Accenture expects net revenues to be in the range of $7.35 billion to $7.60 billion. This range assumes a foreign-exchange impact of negative 11% compared with the third quarter of fiscal 2014.

Revenue Growth Continues At Outsourcing Division

According to our estimates, the outsourcing division contributes approximately 47% to Accenture’s value. This division continued to outpace the outsourcing industry as revenues grew  6% to $3.7 billion (or 13% on a constant currency basis). Additionally, Accenture continued to report strong demand for its outsourcing services with new bookings at $5.11 billion. Furthermore, the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, improved to 1.4 sequentially. However, much of the improvement in book-to-bill was due to sequential decline in revenues. Considering the order pipeline, we expect that outsourcing will continue to deliver growth in Q3 as well. The company expects high single digit growth for outsourcing in the remainder of 2015. However, tempered growth in new order signings in H12015 might negatively impact revenue growth in the ensuing years if order bookings do not improve.

Consulting Revenues Post Growth

Management and technology consulting are important drivers for Accenture’s value and account for around 44% of our price estimate combined. The company reported 4% year-over-year growth in revenues to $3.84 billion in local currency (11% in USD). The Furthermore, the company’s momentum for new orders grew as it booked orders worth $4.25 billion during the quarter. As a result, the book-to-bill ratio, the key metric that ascertains the growth in new contracts, improved to 1.1. As a result, the company expects mid to high single-digit positive growth for consulting in second half of 2015. This guidance also indicates that most of the contracts signed by the company are short-term in nature.

Orderbook Grows At A Slower Pace

Accenture reported new signings worth $9.4 billion during Q2. Despite the 22% sequential growth in new signings in Q2, the order book growth is a concern as new orders booked in the first half of 2015 lag those booked in H12014 by 9%. Even after adjusting for dollar appreciation against the local currency, the new order signings are tepid compared to those of H12014. For Accenture to meet it guidance for 2015, it will have to add orders worth $16 billion in second half of 2015, which is generally weaker. Furthermore, weaker growth in orders can impact the growth in revenues in the coming quarters as the company books revenues against its outstanding order book.

Gross Margins Decline

Accenture’s gross margins declined by over 140 basis points to 29.9% in Q2, primarily due to an increase in its cost of services, which includes compensation, subcontractor and other personnel costs. Two key indicators to this metric  are the utilization rate (number of employees billable to total number of employees) and attrition rate (employees that leave the company). The utilization rate increased to 91% that added pressure on Accenture’s bench strength, and the need to outsource work to subcontractors at higher cost. Considering that the company plans to expand its operating profit margin in 2015 by 10 to 30 basis points, it will have to closely monitor its employee costs as well as SG&A expenses in the next half of 2015.

We are in the process of updating our model. At present, we have a $77.77 price estimate for Accenture, which is 17% below its current market price.

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Notes:
  1. Accenture’s 8-k, March 26 2015, www.sec.gov []