Accenture Earnings: Consulting Boosts Revenues, Currency Headwinds Impacts New Signings

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Accenture

Accenture (NYSE:ACN) reported its Q4 FY 2016 results on Septmber 29th. (Fiscal years end with August.) Due to the recent acquistions, the company posted year-over-year growth in revenues  of 8% (9% in constant currency) to $8.5 billion. This was at the high end of the company’s guided range of $8.3 billion to $8.5 billion. [1] In our pre-earnings note published earlier, we stated that we expected consulting revenues to outpace the industry in the first quarter, while outsourcing revenue to remain fairly weak. The company did report inline with our expectation:

  • Consulting net revenues for the quarter were $4.61 billion, an increase of 11% in (13% in constant currency), compared with the fourth quarter of fiscal 2015.
  • Outsourcing net revenues were $3.88 billion, an increase of 4% (6% in constant currency) over the fourth quarter of fiscal 2015.

During the quarter, the company reported new orders of $9 billion, reflecting a negative 2% foreign currency impact compared with new bookings in the first quarter last year. [2] In this note, we will review and analyze Accenture’s earnings.

See our full analysis for Accenture

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Guidance For FY17 and FYQ1

Accenture expects net revenue in local currency to be in the range of $8.40 billion to $8.65 billion in FYQ1. For fiscal 2017, the company expects net revenue growth to be in the range of 5% to 8% in constant currencies. The company continues to expect diluted EPS to be in the range of $5.75 to $5.98. Accenture expects operating margin for the full fiscal year to be in the range of 14.7 percent to 14.9 percent, an expansion of 10 to 30 basis points from fiscal 2016.

Orderbook Signings Still Questionable As Appreciating Dollar Plays Spoil Sport

Accenture reported new signings worth $9 billion during Q4, which bought the total order backlog to $35.4 billion for the year. Even though the level of new bookings follows typical pattern of higher new bookings in fourth quarter, the new order signings are tepid compared to those of Q4 2015 and were flat. After adjusting for dollar appreciation against the local currencies, level of new bookings represents 2% decline in local currency over last year’s quarter one, with a significant portion expected to convert to revenue in fiscal ’17.

Consulting Revenues Post Growth

Management and technology consulting are important drivers for Accenture’s value and account for around 56.8% of our price estimate combined. Consulting revenues for the quarter were $4.61 billion, up 11% in USD and 13% in local currencies. Furthermore, the company’s momentum for new orders grew as it booked orders of $4.8 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 1.04x. The company expects low double-digit positive growth for consulting in 2017, driven by strong double-digit growth in strategy and consulting services for digital related services. Additionally, the recent acquisitions will help the company to post growth in the next fiscal year (i.e., FY17).

Outsourcing Revenues Decline Due To Currency Headwinds

According to our estimates, the outsourcing division contributes approximately 43.2% to Accenture’s value. While this division continued to outpace the outsourcing industry, net revenues as reported grew by 4% to $3.88 billion, up 6% in constant currencies compared with the fourth quarter of fiscal 2015. However, Accenture reported soft demand for its outsourcing services, with new bookings at $4.2 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 1.08x compared to 1.27x last year. While the company expects mid single-digit growth for its outsourcing services, considering the orders recorded in FY16, which declined by 8% in USD, we believe that the company will struggle to deliver results in event its order signings do not improve over the remainder of FY2017.

We are in the process of updating our model. At present, we have a $115.85 price estimate for Accenture, which is 5% below its current market price.

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Notes:
  1. Accenture earnings release []
  2. Accenture’s Investor relations, September 29 2016 []