Accenture Q3 Results Read-Through: Strong Growth Momentum Continues; Raises FY21 Guidance

 ■    Q3FY21 revenues beat estimates on strong traction in both consulting and outsourcing businesses: Accenture's (ACN) revenues rose 20.7% YoY to USD13.3bn (16% in local currency), well ahead of its guided range of USD12.55bn to USD12.95bn. ACN continues to gain market share and is seeing strong, broad-based demand across industries, services and geographic markets, resulting in an all-round beat in overall operating performance and strong order booking. The company saw strong double-digit growth in local currency in all four strategy priorities - Cloud, Interactive, Industry X and Security - during the quarter. Consulting revenue grew 21% YoY to USD7.3bn in Q3 (16% in local currency) and saw a sharp QoQ/YoY uptick after moderate growth in Q2. Revenue growth in the outsourcing business further accelerated to 20.2% YoY at USD6bn (16% in local currency). New bookings were solid at USD15.4bn (39.3% YoY, book-to-bill 1.2x), a tad lower than record booking of Q2, with consulting bookings of USD8bn (29.6% YoY, book-to-bill 1.1x) and outsourcing bookings of USD7.4bn (51.9% YoY, book-to-bill 1.2x). Operating margin expanded by 40bps to 16%. Utilization stood at 93% in Q3 vs. 94% in Q2 and 88% in Q3FY20. Attrition rose to 17% in Q3 from 12% in Q2. The company added 32,074 net employees during the quarter.

■    Broad-based growth across verticals: Growth in Q3 was driven by Health & Public Services (21% in local currency), Communication, Media & Technology (19% in local currency), Products (17% in local currency) and Financial Services (16% in local currency). Resources returned to growth and grew 3% YoY in local currency. The company expects to sustain broad-based growth momentum in the coming quarters.

■    FY21 guidance further raised to 10-11%: ACN raised its revenue growth guidance for FY21 to 10-11% in local currency from 6.5-8.5% 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 40bps to 15.1% (earlier 15-15.1%). ACN expects Q4FY21 revenues to be in the range of USD13.1-13.5bn, up 17-21% YoY in local currency. The company expects OCF and FCF to be in the range of USD8.65-9.15bn and USD8-8.5bn, respectively.

■    Earnings call takeaways: Revenue growth for Q3FY21 was broad based, with 11 out of 13 industries seeing double-digit growth. FY21 revenue growth is driven by traction in organic revenue growth as the company continues to expect M&A to contribute ~2.5% to revenue growth in FY21. The company announced 39 acquisitions in FY21YTD split across North America - 10, Europe - 17 and growth markets - 12. It plans to invest at least USD4bn in strategic acquisitions in FY21 (earlier ~USD2bn) and intends to spend another USD4bn in FY22. Accenture announced two >USD1bn acquisitions (Novetta and Umlaut) during the quarter. It expects acquisitions to contribute ~4% to revenue growth in FY22. ACN signed deals worth over USD100mn with record 20 clients in Q3 (54 FYTD'21). Despite solid large-deal intake during last two quarters, the deal pipeline remains strong. ACN promoted a record 117,000 employees, including 1,200 managing directors, so far in FY21. It expects modest expansion in operating margins to continue in FY22 despite the war for talent and higher amortization charges.

■    Read-through for Indian IT peers: ACN's strong Q3 performance and further upward revision in FY21 revenue growth guidance (from 2-5% in early FY21; 4-6% at Q1-end and 6.5-8.5% at Q2-end) reflect strong demand. A broad-based demand uptick and sustained growth momentum in revenue/order booking of the outsourcing business augur well for Indian IT peers. Though attrition has inched up across the sector, it is still lower than the peak seen in the past. The Nifty IT index rose ~13%/~21%/~99% in last 3M/6M/12M vs. ~9%/15%/53% of the Nifty index. We believe that strong demand environment, sustained acceleration in revenue growth and robust order booking will support higher valuations. We prefer INFO, HCLT and TECHM among Tier-1 names.