Accenture Earnings Preview: Revenues To Grow In Q3

by Trefis Team
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Accenture (NYSE:ACN) is set to report its fiscal Q3 results on June 22. In the previous quarter, the company delivered 5% year-over-year growth (6% in constant currency) in revenues to $8.3 billion, at the higher end of its guidance range. The company delivered strong growth for both its Outsourcing business, which has outpaced the industry, and its Consulting business. While new signings dipped in the previous quarters, the company’s order book is robust, 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 Q3, Fiscal 2017

Accenture expects its net revenue to be in the range of $8.65 billion to $8.90 billion in fiscal Q3, growth of 5-8% in constant currency. For fiscal 2017, the company has revised its guidance upwards and now expects net revenue growth to be in the range of 6% to 8% in constant currency. The company stated in its press release that it expects to record a $425 million non-cash settlement charge, which is related to the termination of its pension plan in the U.S., and will reduce the company’s EPS by around $0.39 on a GAAP basis for the fiscal year. Based on this update, it expects diluted EPS to be in the range of $5.31 to $5.48 for the year. Accenture continues to expect its operating margin for the full fiscal year to be in the range of 13.5% to 13.7%, a decline of 110 to 90 basis points from fiscal 2016. Excluding the settlement charge, the company expects its operating margin to be in the range of 14.7 percent to 14.9 percent, an expansion of 10 to 30 basis points from fiscal 2016.

Consulting Revenues To Grow Due To Acquisitions

Consulting is the most important division for Accenture, accounting for around 55% of our price estimate. 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. Improved business consulting activities in the U.S. and Europe have further helped the company to post growth in its Consulting revenues in the last few quarters. Nevertheless, we believe that new order signings may be under pressure in the remainder of 2017 due to a number of factors, including pricing pressure and long-term nature of new signings. However, we expect consulting revenues to grow marginally in Q3 2017.

Outsourcing Revenues To Grow As Order Signings Improve

According to our estimates, the Outsourcing division accounts for approximately 41% of Accenture’s value. Accenture’s Outsourcing division reported stellar results in Q2, as the company outpaced the broader outsourcing industry. The book-to-bill ratio, which indicates the dollar amount of new orders received for every dollar amount of revenue billed, grew to 1.17x. We note that the orders recorded in fiscal Q2 only grew by 1% in constant currency. While the company expects mid-single digit growth for its outsourcing services, the company may struggle to deliver these results if order signings do not improve over the remainder of fiscal 2017. We believe that new signings did improve during Q3, and we expect the company to maintain its book to bill ratio at 1.2x, indicating that the company’s signings will grow compared to revenue recorded from older contracts, as estimated in the chart below.

We currently have a $119 Trefis price estimate for Accenture, which is slightly below the current market price.

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