Q2FY21 revenue beats estimates on the back of double-digit growth in outsourcing business: Accenture's (ACN) revenues rose 8.5% YoY to USD12.1bn (5% in local currency), well ahead of its guided range of USD11.55bn to USD11.95bn. A decline in revenues from reimbursable travel costs affected revenue growth by ~2%. ACN's revenue growth returned to the pre-Covid level in Q2, a quarter ahead of its expectations. ACN has seen strong, broad-based demand across industries, services and geographic markets, resulting in an all-round beat in the overall operating performance and strong order booking. After falling for three quarters, consulting revenues grew 4.3% YoY to USD6.4bn (1% in local currency; including ~3% impact from a decline in revenues from reimbursable travel costs). Outsourcing revenues maintained strong momentum with 13.7% YoY growth at USD5.7bn (11% in local currency). New bookings stood at an all-time high of USD16bn (12.7% YoY, book-to-bill 1.3x), with consulting bookings of USD8bn (12.2% YoY, book-to-bill 1.2x) and outsourcing bookings of USD8bn (13.3% YoY, book-to-bill 1.4x). Operating margin expanded by 30bps to 13.7%. Utilization increased to 94% in Q2 (vs. 93% in Q1 and 91% in Q2FY20). Attrition inched up to 12% in Q2 vs. 9% in Q1. It added 22,365 net employees during the quarter.
■ Health & Public Services and Financial Services lead growth: Growth in Q2 was driven by Health & Public Services (14% in local currency) and Financial Services (10% in local currency). Communication, Media & Technology maintained its growth momentum and recorded 9% YoY growth in local currency (vs. 3% in Q1FY21). Products also returned to growth, up 2% YoY in local currency. Resources remained weak and fell 7% YoY in local currency. The company expects to sustain broad-based growth momentum and expects Resources' growth trajectory to improve.
■ FY21 guidance further raised to 6.5%-8.5%: ACN raised its revenue growth guidance for FY21 to 6.5%-8.5% in local currency from 4%-6% previously. The guidance continues to assume about 1% negative impact from a decline in revenues from reimbursable travel costs. The operating margin is expected to expand by 30-40bps to 15%-15.1% (earlier 14.8%-15%). ACN expects Q3FY21 revenues to be in the range of USD12.55-12.95bn, up 10%-13% YoY in local currency. The company expects OCF and FCF to be in the range of USD7.65-8.15bn and USD7-7.5bn, respectively.
■ Earnings call takeaways: Management noted that ACN has returned to the pre-pandemic growth trajectory, a quarter ahead of their expectations, while continuing to expand market share faster than the pre-Covid rate. Revised guidance factored in better than expected H1 and sustained growth momentum in H2. ~50% of ACN's revenues came from seven industries that were less impacted by the pandemic and in aggregate grew in low double digits in Q2. The severely affected industries, namely Travel, Retail, Energy, High-Tech (including Aerospace and Defense) and Industrial (collectively ~20% of revenues) reported improvement in revenue growth and posted a mid-single digit decline in Q2 (vs. double-digit decline in Q1). ACN signed deals worth over USD100mn with 18 clients in Q2. The company spent ~USD1.1bn on 19 acquisitions in H1 and increased its M&A budget to at least USD2bn for FY21 (from ~USD1.7bn). It expects M&A to contribute ~2.5% to revenue growth in FY21 (earlier ~2%). The company announced a one-time bonus, equal to one week of base pay, for all employees below managing director.
■ Read-through for Indian IT peers: ACN's strong Q2 performance and second-time upward revision in FY21 revenue growth guidance (from 2-5% in early FY21; 4-6% at Q1-end) reflect strength in demand, particularly in outsourcing. A broad-based demand recovery and sustained growth momentum in revenue/order booking of the outsourcing business augur well for Indian IT peers. The Nifty IT index rose ~9%/~28%/~116% in last 3M/6M/12M. Strong demand environment, sustained acceleration in revenue growth and robust order booking should support higher valuations, in our views. We prefer INFO, HCLT and TECHM among Tier 1 companies.