What Are We Expecting From Accenture In 2017?

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ACN: Accenture logo
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Accenture

Accenture (NYSE:ACN) excelled in 2016 as its consulting division reported growth in both new signings and revenue. However, the outsourcing division, which was once the cash cow for the company, faces intense competition. This has resulted in a decline in new signings for outsourcing and lower than expected growth. Nevertheless, the company is aggressively acquiring companies in order to improve its footprint across the globe and building its portfolio of products and services for new technologies such as Machine Learning (Artificial Intelligence) etc. THe year 2017 holds promise for the company as it continues to improve its offering and products.

See our full analysis for Accenture

Consulting Business Will Drive Revenue In 2017

The consulting division makes up 59% of Accenture’s stock value in our estimation and contributed 54.26% to the revenues in 2016. Accenture’s consulting division offers services across multiple domains including finance, operations, strategy, risk management and talent managment. These services are offered across multiple verticals and industries such as banking, capital markets, chemical, energy, health, insurance, life sciences, retail etc.

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Over the past three years, consulting revenues have grown at a CAGR of 5.7% from $15.36 billion in 2013 to $18.17 billion in 2016. (The company’s fiscal years end with August, though we base our data on the calendar year ending in December for comparative purposes.) An important factor for this growth has been the growth in new contract signings, which have grown at a CAGR of 6.23% from $16.38 billion in 2013 to $19.64 billion in 2016. The book-to-bill ratio, the key metric that ascertains the growth in new contracts, has been stable at 1.08x or 108%.

The primary reason for the growth in new signings has been strong double-digit growth in strategy and consulting services for digital-related services. Accenture has been able to strategically position itself in these domains through acquisitions over the past few years. [1] These acquisitions not only diversified Accenture’s geographical footprint but also augmented its portfolio of services in the emerging Cloud, the Internet of Things, mobile computing and cyber security domains. Furthermore, opportunities in social media, mobile, analytics and cloud (SMAC) are abundant. Companies are looking to tightly integrate their existing services with SMAC. Accenture, through its consulting practice, has a significant body of knowledge on clients’ businesses and processes, which helps it stay closer to clients. We expect that as the company continues to focus on emerging technologies, the consulting division will continue to post 5% growth in organic revenues. However, the company continues to acquire companies in order to improve its service portfolio and reach across the globe. This strategy can have a meaningful impact on the topline, as it did in 2016.

Outsourcing Will Continue To Decline

According to our estimates, the outsourcing division contributes approximately ~41% to Accenture’s value. While this division continues to outpace its peers, net revenues grew at a tepid CAGR of 4.7% from $13.3 billion in CY2013 to $15.33 billion in 2016. Additionally, new contract signings have declined at a CAGR of 3.4% from $18.1 billion in 2013 to $16.33 billion in FY2016. As a result, the book-to-bill ratio has declined from 1.36x to 1.08x over this period.

The primary reason for the slowdown in Accenture’s outsourcing has been the soft demand for its outsourcing services, due to increased competition. Companies such as Infosys, Wipro and TCS are operating successfully in the outsourcing space. Generally, these companies, especially the Indian ones, operate on a lower billing rate and have dented Accenture’s market share in the outsourcing industry. Nevertheless, Accenture holds an edge with superior knowledge centers and its pool of experienced management and technology consultants. We expect that Accenture will continue to leverage its knowledge and technical know-how to bag more outsourcing contracts and keep competition at bay. Additionally, with the advent of cloud computing, Artificial Intelligence and machine learning (ChatBots), need for employing extensive manpower at offshore centers has been eliminated. As a result, the contract value of new signings has been low compared to previous years. Therefore, we believe that new signings for outsourcing will decline by 4% to $15.68 billion in 2017. As a result, outsourcing revenues would decline to $14.2 billion in 2017.

At present, we have a $118 price estimate for Accenture, which is 2.5% below its current market price.

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Notes:
  1. Read about Accenture’s acquisition in 2016 here. []