Accenture Earnings Preview: Revenues To Grow As Bookings Set To Improve For Consulting

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ACN: Accenture logo
ACN
Accenture

Accenture (NYSE:ACN) is set to announce its Q1 FY2017 results on December 21st. (Fiscal years end with August.) In the previous quarter, the company delivered strong growth for both its consulting business, which has outpaced the industry, and its outsourcing business. The company reported 8% year-over-year growth (9% in constant currency) in revenues to $8.5 billion, above its guided range. While the company witnessed better-than-expected order bookings across both consulting and outsourcing segments, cross currency headwinds eroded some of the sheen from the results. We expect this trend continued in Q1 and believe that the company will be able to post growth in the quarter. Additionally, inorganic growth from acquiring companies likely further boosted the top line in Q1.

See our full analysis on Accenture

Guidance For FY17 and FYQ1
Accenture guided 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% to 14.9%, an expansion of 10 to 30 basis points from fiscal 2016.

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Acquisition To Boost Order Book In Q1 And Beyond  

Accenture reported new signings worth $9 billion during Q4. Despite the 8% increase in revenue during Q4, 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. We expect that this trend continued during Q1 and the company could report a decline in dollar-denominated contract value. However, the company continues to acquire firms across the world. This should help the company to not only report an improvement in its revenues, but also help it to offset the negative effects of dollar 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 53.2% of our price estimate. This business has reported growth of close to 11% in the trailing twelve months as consulting business activity improved in the U.S. and Europe. Furthermore, the order pipeline for consulting has improved by $2.39 billion over the trailing twelve months. Nevertheless, we believe that new order signings and revenues were under pressure in 2017 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. However, the company has acquired a host of new companies in the last twelve months.  These will add inorganically to both its revenue and  its order book. This likely spurred growth from consulting in the quarter and will continue to do so going forward.

Outsourcing Revenues To Grow At A Tepid Rate

According to our estimates, the outsourcing division contributes approximately 40.4% to Accenture’s value. Accenture’s outsourcing division has reported lackluster performance during the past year as intense competition in the industry has resulted in price competition. As a result, Accenture reported demand for its outsourcing services waned in Q4. 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 1.08x. While we expect new signings failed to pick up during Q1, 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 $118.04 Trefis price estimate for Accenture, which is 6% below the current market price.

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