Accenture Earnings Preview: Acquisitions To Boost Topline And Orderbook In Q4

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Accenture

Accenture (NYSE:ACN) is set to announce its Q4 FY2016 results on September 29th. (Fiscal years end in August.) In the previous quarter, the company delivered strong growth for its consulting business, which has outpaced the industry, and the outsourcing division. The company reported 10% year-over-year growth (in constant currency) in revenues to $8.43 billion, above its guided range. The high point for the company was better-than-expected order bookings across both consulting and outsourcing segments. We expect this trend to continue in Q4 and believe that the company will be able to post growth in the quarter, largely due to inorganic growth from acquiring companies over the past few months.

Apart from the growth in order backlog, we continue to monitor organic  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 FY16 and Fiscal Q4

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With last quarter’s earnings, Accenture raised its full-year revenue growth forecast for the fiscal year. The company expects net revenue growth in local currency to be in the range of 9.5% to 10%. It also expects diluted GAAP EPS to be in the range of $5.29 to $5.33, 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. Accenture expects net revenues for the fourth quarter of fiscal 2016 to be in the range of $8.25 billion to $8.50 billion.

Acquisition To Boost Order Book In Q4

Accenture reported new signings worth $9.10 billion during Q3. Despite the 8.4% (10% in constant currency) increase in revenue during Q3, the less-than-expected 7.3% quarter-over-quarter growth in new signings in Q3 was a concern. The company embarked upon acquisitions across the world. This should help the company to not only report an improvement in its revenues but also help it to post a growth for its new order signings.

Consulting Revenues To Grow Due To Acquisitions

Consulting is the most important driver for Accenture’s value and account for around 56.8% of our price estimate. This division has reported growth of close to 10% in the trailing nine months as consulting business activity improved in the U.S. and Europe. Furthermore, the order pipeline for consulting has improved by $1.69 billion in the last three quarters. Nevertheless, we believe that new order signings and revenues were under pressure in Q4 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 the last six months and that would add inorganically to its topline and orderbook. This will likely spur growth from consulting for Q4 FY2016 and beyond.

Outsourcing Revenues To Grow At A Tepid Rate

According to our estimates, the outsourcing division contributes approximately 43.2% to Accenture’s value. Accenture’s outsourcing division has reported lack luster performance during the year as intense competition in the industry has resulted in price war. As a result, Accenture reported demand for its outsourcing services waned in Q3 with new bookings at $4.2 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, has stabilized at 1.1x. While we expect new signings picked up during Q4, we expect that the company to maintain its the book to bill ratio at 1.1x during the quarter, indicating that the company signings will slow down compared to revenue recorded from older contracts, as estimated in the driver below.

We currently have a $115.65 Trefis price estimate for Accenture, which is in line with its current market price.

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