Why Accenture’s Sub-Par Consulting Performance In Q4 Wasn’t A Surprise

by Trefis Team
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196
Market
176
Trefis
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Accenture
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Accenture (NYSE:ACN) reported its fiscal Q4 results late last week. While the revenue was in line with expectations, the EPS figure was ahead of street expectations. Q4 marked the first earnings for Accenture’s new CEO, Julie Sweet. The notable point about Q4 earnings was a marked weakness in consulting revenues, which for Q4 grew to $6.2 billion versus $5.9 billion (5% y-o-y ). While 5% may not be a bad number in itself, given that the outsourcing division met expectations of a high single-digit growth, this was a disappointment.

At Trefis, we had highlighted the possibility of Accenture’s consulting revenues suffering due to a reduction in the Fed funds rate back in June. We believe that Accenture’s revenues will see modest growth over the current fiscal year and maintain a $176 price estimate for the company’s stock, which is roughly 10% below the current market price.

A Quick Overview Of Accenture’s Business Model

What Need Does It Serve?

  • Accenture makes money by offering professional services including consulting and outsourcing across strategy and technology.

Has 2 Operating Segments

  • Consulting Division: Segment revenue growth over the last couple of years has been due to increase in digital transformation projects aimed at helping clients make their businesses more agile.
  • Outsourcing Division: Segment revenue is derived from maintenance and support offerings. The consulting projects typically help create a strong pipeline of outsourcing projects.
  • These two divisions are expected to contribute roughly $27 billion (56%) and $21 billion (44%) to Accenture’s revenue estimate of $48 billion for full-year 2020

What Are The Alternatives?

  • The need for digital transformation has blurred the line between pure-play technology and strategy consulting. This has led to large professional services firms increasingly becoming involved in this area.
  • Large IT firms (Cognizant, Tata Consultancy Services, Wipro, Infosys, HCL etc), strategy consulting firms (BCG, McKenzie, Bain, AT Kearney etc) and the Big 4 audit firms have all been trying to cater to the growing transformation opportunity.

[A] Consulting Division Revenue growth of about $2.5 billion over the next two years will be driven by growing need for digital transformation.

  • Consulting Division revenue increased by $6.8 billion over the last couple of years.
  • Over the next couple of years, the company’s increasing focus on digital business is likely to lead to a growth of $2.5 billion.

[B] Outsourcing Division Revenues to grow by about $1.7 billion over the next two years due to increase in automation and through tailwinds from Consulting business.

  • Over the last couple of years, the $4 billion increase in revenue has been driven by incremental adoption of the company’s automation offerings.
  • Over the next couple of years, the incremental $1.7 billion is likely to be derived from the long tail of revenue that Consulting revenues create.

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