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Accenture Earnings: Growth In Outsourcing Revenue Boosts Top Line

Accenture ( ACN ) reported its Q2 2017 results on March 23, posting 5% year-over-year growth (6% in constant currency) in revenues to $8.32 billion. In our pre-earnings note published  earlier, we stated that we expected Consulting revenues to outpace the industry in the second quarter, while Outsourcing revenue would grow at a tepid rate. However, the Outsourcing division delivered a positive surprise even as growth in Consulting revenues slowed down.

  • Consulting net revenues for the quarter were $4.41 billion, an increase of 3% year-over-year in U.S. dollars and 5% in constant currency.
  • Outsourcing net revenues were $3.91 billion, an increase of 7% in U.S. dollars and 8% in constant currency.

During the quarter, the company reported new orders of $9.2 billion, reflecting a negative 2% foreign-currency impact compared with new bookings in the second quarter last year. The details of earnings are below.

See our full analysis for Accenture

Guidance For FY17 and FYQ3

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.

Order Book Signings Slows Down

Accenture reported new signings of $9.2 billion during Q2, which bought the total order backlog to $36 billion, according to our estimates. Even though the level of new bookings follows the typical pattern of new bookings in second quarter, new order signings declined by 3.6% compared to those in Q2 2016. Considering the historical book-to-bill ratio, we expect solid revenue growth in the coming year. Additionally, the company will likely continue to add to revenue growth through acquisitions.

Consulting Revenues Post Tepid Growth

Management and Technology Consulting are important drivers for Accenture’s value and account for around 56% of our price estimate for the company. Consulting revenues for the quarter were $4.41 billion, up 2.7%. Furthermore, the company’s momentum for new orders grew as it booked orders of $4.6 billion (or 50% of total new bookings) during the quarter. The book-to-bill ratio, the key metric that ascertains the growth in new contracts, stabilized at 1.04. We note that the orders recorded in Q2 declined by 8% in constant currency.

While the new signings for consulting have been below expectations, we expect that the Consulting business will deliver mid to low-single-digit growth in Q3 2017 as the significant investments in new and high-growth areas across Accenture continue to gain traction in the year. Specific areas of higher growth – which include digital, cloud and security services – now account for more than 45% of total revenues. Accenture continues to acquire companies in these verticals to bolster revenue growth and gain a foothold in emerging technologies. This bodes well for the company in the future.

Outsourcing Revenues Post Robust Growth

According to our estimates, the Outsourcing division contributes approximately 39% of Accenture’s value. During the quarter, this division continued to outpace the broader outsourcing industry, as net revenues grew by 7% to $3.91 billion. Accenture reported strong demand for its outsourcing services, with new bookings at $4.6 billion. Generally, the fiscal second quarter contributes substantially to Outsourcing signings. The outsourcing book-to-bill ratio grew to 1.17x in the quarter. The company expects mid-single digit growth for its outsourcing services, and we believe that the company can deliver these results if order signings improve further in fiscal 2017.

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Article source: http://www.nasdaq.com/article/accenture-earnings-growth-in-outsourcing-revenue-boosts-top-line-cm765373

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