Accenture Earnings: Revenues Grow Amidst Decline In New Signings

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Accenture

Accenture (NYSE:ACN) reported its Q3 FY 2015 results on June 25th and the results exceeded market expectations.  Fiscal years end with August) Due to the strong dollar, the company posted  negligible year-over-year growth in revenues to $7.8 billion,  though revenues were up 10% in constant currencies. This was above the company’s guided range of $7.35 billion to $7.60 billion. In our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the third quarter. However, this did not materialize as the USD appreciation eroded growth, as we noted. We expected consulting revenues to register growth, and the company posted just 1% year-over-year growth in revenues to $4.1 billion, though it was up 11% in constant currencies. Additionally, during the quarter, the company reported new orders worth $8.5 billion. [1] The slower growth rate in new signings indicates the underlying softness in demand for IT services and will surely impact Accenture’s revenues in future quarters.  That said, the company increased its guidance for 2015. In this note, we will review and analyze Accenture’s earnings.

See our full analysis for Accenture

Guidance For FY15 and Q4

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Accenture raised its full-year revenue growth forecast for the third time. It now expects net revenue growth in local currency to be in the range of 9% to 10%, compared with 8% to 10% previously. It now expects diluted GAAP EPS to be in the range of $4.67 to $4.72, 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 pension settlement charge of $0.06 per share in the third quarter, the company now expects adjusted EPS to be in the range of $4.73 to $4.78. The company’s previously guided range for EPS was $4.66 to $4.76. Furthermore, Accenture is targeting new bookings for fiscal 2015 in the range of $33 billion to $35 billion. Accenture expects net revenues for the fourth quarter of fiscal 2015 to be in the range of $7.45 billion to $7.70 billion. This range assumes a foreign-exchange impact of negative 10 percent compared with the fourth quarter of fiscal 2014.

Revenue Growth At Outsourcing Division Flatlines Due To Currency Headwinds

According to our estimates, the outsourcing division contributes approximately 47% to Accenture’s value. While this division continued to outpace the outsourcing industry, net revenues were $3.66 billion, which was flat as report but up 10 percent in constant currencies compared with the third quarter of fiscal 2014. However, Accenture reported lower than expected demand for its outsourcing services with new bookings at $4 billion or 47% of new bookings. The book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, declined to 1.1 sequentially from 1.4. Considering the order pipeline, we expect that outsourcing will continue to deliver growth in Q4 as well. However, tempered growth in new order signings in the last nine months 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 1% year-over-year growth in revenues to $4.11 billion in USD (up 11% in constant currencies). Furthermore, the company’s momentum for new orders grew as it booked orders worth $4.5 billion or 53% of total new bookings during the quarter. The book-to-bill ratio, the key metric that ascertains the growth in new contracts, stabilized at 1.1. The company expects mid to high single-digit positive growth for consulting in fourth quarter of 2015. This guidance also indicates that most of the contracts signed by the company are short-term in nature.

Orderbook Signings Decline

Accenture reported new signings worth $8.5 billion during Q3. This was 10% lower than the new signings in Q2. Additionally, the new orders booked in the first nine months of 2015 lag those booked in 2014. Even after adjusting for dollar appreciation against the local currencies (approximately 10%), the new order signings are tepid compared to those of 2014. While Accenture will meet its guidance for 2015, its revenue growth in the coming years might lag the vigor posted in 2015 as the company books revenues against its outstanding order book.

We are in the process of updating our model. At present, we have a $77.41 price estimate for Accenture, which is 22% below its current market price.

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Notes:
  1. Accenture’s 10-Q, June 25 2015, www.sec.gov []