Accenture Earnings Preview: Revenue Likely To See Further Growth

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ACN: Accenture logo
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Accenture

Accenture (NYSE:ACN) is set to report its fiscal Q2 results on March 23. [1] In the previous quarter, the company delivered 6% year-over-year growth (7% in constant currency) in revenues to $8.5 billion, at the higher end of its guidance range. The company delivered strong growth for both its Consulting business, which has outpaced the industry, and its Outsourcing business. Its order signings grew in recent quarters, which leads us to believe that the company will report further growth in revenues, likely at the higher end of its guidance range again.

See our full analysis for Accenture

Guidance For FY17 and FYQ2

Accenture expects net revenue to be in the range of $8.15 billion to $8.40 billion in Q2, growth of 5-8% on a constant currency basis. For fiscal 2017, the company expects net revenue growth to be in the range of 5% to 8% in constant currency. Based on the updated foreign exchange assumptions, it expects diluted EPS to be in the range of $5.64 to $5.87. Accenture continues to expect its operating margin for the full fiscal year to be in the range of 14.7% to 14.9%, which would be expansion of 10 to 30 basis points from fiscal 2016.

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Consulting Revenues To Grow Due To Acquisitions

Consulting is the most important driver for Accenture’s value, accounting for around 56% of our price estimate, and contributed around 54% of its revenues in 2016. The company has seen solid growth in its Consulting revenues as consulting business activity improved in the U.S. and Europe. 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. These acquisitions not only diversified Accenture’s geographical footprint but also augmented its portfolio of services in the Cloud, Internet of Things, mobile computing and cyber security domains. Furthermore, opportunities in social media, mobile, analytics and cloud (SMAC) are abundant. The order pipeline for consulting also improved in 2016. Nevertheless, we believe that new order signings and revenues may be 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. Despite these factors, we expect revenues to grow in Q2 2017.

Outsourcing Revenues To Grow At A Tepid Rate

According to our estimates, the Outsourcing division contributes approximately 39% of Accenture’s value. Accenture’s Outsourcing division has reported a relatively 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 2016. The book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, declined to 1.07. We note that the orders recorded in fiscal Q1 only grew by 3.0% in constant currency. While the company expects mid-single digit growth for its outsourcing services, we believe that the company will struggle to deliver these results if order signings do not improve over the remainder of fiscal 2017. We believe that new signings likely failed to pick up during Q2, and we expect the company to maintain its book to bill ratio at 1.1x, indicating that the company’s signings will slow down compared to revenue recorded from older contracts, as estimated in the chart below.

We currently have a $117 Trefis price estimate for Accenture, which is slightly below the current market price.

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Notes:
  1. Accenture Press Release []