Accenture Pre-Earnings: What We Are Watching?

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Accenture

Accenture (NYSE:ACN) is set to announce its Q3 FY2015 results on June 25th. (Fiscal years end in August.) In the previous quarter, the company delivered strong growth for its outsourcing business, which has outpaced the industry, and the consulting division. The company reported 5% year-over-year growth in revenues to $7.49 billion, above its guided range. Adjusting for currency effects, the rate of growth was 12%.  However, the point of concern was lower-than-expected order bookings across both consulting and outsourcing segments. In this earnings announcement, we will continue to observe the growth in order pipeline as it will help us in ascertaining the effects of economic headwinds, especially from Europe, which is under-performing the global economy. Apart from the growth in order backlog, we continue to monitor growth in revenue from the outsourcing division and the consulting division, as it will help us in understanding the growth in revenue from existing order pipeline.

See our full analysis on Accenture

Guidance For FY15 and Q3

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Accenture expects net revenue growth in local currency to be in the range of 8% to 10%, compared with 5% to 8% previously. It also 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. Furthermore, Accenture is 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.

Outsourcing Revenues To Grow

According to our estimates, the outsourcing division contributes approximately 47.5% to Accenture’s value. Accenture’s outsourcing division has outpaced the industry and clocked over 10% year-over-year growth in recent quarters. However, Accenture reported good demand for its outsourcing services with new bookings at $5.11 billion in the previous quarter, and the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, grew to 1.4x. This bodes well for growth in future revenues of the company as it can only book revenues against orders booked. While we expect that new signings picked up during the quarter, the guidance indicates that the book to bill ratio will be at 1.35x, indicating that the company signings will slow down compared revenue recorded from older contracts, as estimated in the driver below.

Consulting Revenues To Remain Tepid

Consulting is an important driver for Accenture’s value and account for around 44.5% of our price estimate combined. While this division failed to deliver growth for most of the FY2014, it did report marginal 4% year-over-year growth in revenues to $3.84 billion in Q2 FY15 as consulting business activity improved in Europe. Furthermore, order pipeline improved by $4.25 billion. However, we believe that new order signings and revenues were under pressure in Q2 due to three primary factors. First, the business environment remains challenging as clients continue to shy away from discretionary IT spending. Second, Accenture continues to book long-term contracts, which take longer to convert to revenue. Third, pricing pressure continues to suppress the growth in consulting. Additionally, poor economic data, particularly from China and Europe, continue to temper global business sentiment, which makes us believe that consulting order-book will continue to grow at a slower pace. This will likely suppress growth from consulting during the remainder of the FY2015.

Order Book Growth In Focus

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.

New Business Verticals Under Scanner

Accenture continues to focus its vertical industry practice groups on the needs of its clients in emerging areas such as social media, mobility, analytics and cloud (SMAC). Accenture has successfully built its portfolio across both digital marketing and SMAC capabilities. According to Gartner, Accenture is a leader in its magic quadrant for digital marketing services. Accenture also leads in other areas such as cloud deployment and analytics. Addressing client needs in these verticals will not only bolster Accenture’s growth in the coming years, but also help it in positioning itself on the highest-value, most profitable parts of the client’ s business. The company’s goal is to enhance its client engagements by operating as much as possible at the strategic, C-level echelon, where it can make both the biggest difference and the most money. In this earnings announcement, we will be closely monitoring the release and commentary for the impact of these efforts in driving Accenture’s overall revenues and margins.

We currently have a $77.41 Trefis price estimate for Accenture, which is 20% below its current market price.

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