Accenture Earnings Preview: Acquisitions To Boost Topline, While Order-book Growth To Remain Tepid

Accenture (NYSE:ACN) is set to announce its Q4 FY2015 results on September 24th. (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 10% year-over-year growth (in constant currency) in revenues to $7.8 billion, above its guided range. The point of concern was lower-than-expected order bookings across both consulting and outsourcing segments. However, we believe that the company will be able to post growth in the quarter, largely due to inorganic growth from acquiring companies over the past quarter.

Additionally, 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 Fiscal Q4

With last quarter’s earnings, 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.

Order Book Growth Under The Scanner

Accenture reported new signings worth $8.5 billion during Q3. Despite the increase in revenue during Q3, the 10% sequential decline in new signings in Q3 is a concern. Even after adjusting for dollar appreciation against the local currency, the new order signings are tepid compared to those of 2014. For Accenture to meet it guidance for 2015, it will have to add orders worth $8 billion in fourth quarter 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.

Outsourcing Revenues To Grow

According to our estimates, the outsourcing division contributes approximately 47.7% 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 demand for its outsourcing services waned in Q3 with new bookings at $4 billion in the previous quarter. Furthermore, the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, declined to 1.1x. While we expect that new signings picked up during Q4, the guidance indicates that the book to bill ratio will be at 1.35x, indicating that the company signings will slow down compared to revenue recorded from older contracts, as estimated in the driver below.

Consulting Revenues To Grow Due To Acquisitions

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 FY2015, it did report 11% year-over-year growth in revenues to $4.11 billion in Q3 FY15 as consulting business activity improved in Europe. Furthermore, order pipeline improved by $4.5 billion. Nevertheless, we believe that new order signings and revenues were under pressure in Q3 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. However, the company has acquired a host of new companies in Q4 that should add inorganically to its topline and orderbook. This will likely spur growth from consulting for Q4 FY2015 and beyond.

We currently have a $79.86 Trefis price estimate for Accenture, which is 23% below its current market price.

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