Friday, June 24, 2022

Accenture Report Strong Growth In Q3. IT Services Will See Strong Results In Uncertain Times

Accenture reported strong revenue growth of 27% in constant currency (c/c) in 3QFY22, beating the upper end of guidance. Growth was strong all-round. Order book growth was good but lower than revenue growth at 15% in c/c. FY2022 revenue growth guidance was raised to 25.5-26.5%. Headcount addition was modest. Management indicated no change in decision-making and expects strong bookings and revenue growth in 4QFY22. Results were strong though the focus of the Street has shifted to impact on business in a recessionary environment.

Strong broad-based revenue growth; moderate bookings growth

Accenture reported 27% c/c revenue growth and 22% in reported terms to US$16.2 bn in 3QFY22 (May 2022 ending quarter). C/c revenues were above the guidance range. Revenue growth was strong across geos and verticals. Growth was led by CMT and products verticals that grew 31% each. Growth was good in financial services (24%) and health & public services (19%). Consulting grew 30%, while outsourcing grew 23%. Interestingly, segments which were perceived to be vulnerable delivered well—Europe (30% in c/c, helped partly by acquisitions) and products segments. EBIT margin increased by 10 bps yoy. Bookings growth was steady at 10% in reported terms and 15% in c/c. Headcount addition was muted at 12K employees, while attrition surprisingly increased to 20% (from 18% in 2QFY22).

Revenue guidance increased again; EPS guidance cut due to loss from sale of Russia operations

Accenture increased revenue growth guidance once again to 25.5-26.5% from 24-26% earlier, impressive. The guidance increase is large enough noting that just one quarter remains for completion of FY2022. EPS guidance was cut to US$10.61-10.7 from US$10.61-10.81, due to additional cross-currency headwinds and loss on disposition of Russia operations (US$96.2 mn hit). Revenue growth guidance for 4QFY22 at 20-24% is remarkably strong. Management has also guided for strong order bookings.

Moderate growth in bookings, the discussion point

Bookings grew 10% to US$17 bn (15% in c/c). In reported terms, consulting bookings grew 13.5%, while outsourcing was a lot more sedate at 6.1%. Book to bill ratio on LTM basis was 1.1 in consulting and 1.2 in outsourcing. We note that 15% c/c/ bookings growth, off a high base of 40% growth of the previous year, is a reasonably good outcome. In any case, the company has guided for solid bookings growth in 4QFY22.

No change in decision-making cycle

Demand is strong with no change in the decision-making cycle. The nature of conversations has changed depending on the industry vertical served. For example, cost focus has increased in consumer goods industries. Predictably, not much insight was offered on demand for FY2023.

The immediate impact of a deteriorating environment is not visible from the results or decision-making of clients. In fact, Accenture increased revenue growth guidance, reported stronger growth in Europe (perceived to be more vulnerable) and delivered better growth in bookings in consulting (considered to be more vulnerable). In a way, the results and outlook are as good as it gets, especially in the context of lowered expectations, visible in 12% correction in stock price in the past three months (46% correction from the peak). 

Clients continue to pursue compressed transformation

Companies continue to invest in cloud migration and transformation with greater speed and scope. Early adopters of cloud are building further capabilities using data and AI. Digital laggards are investing to catch up to leaders. Decision-making by clients has not slowed down yet. Clients are reprioritizing investments and focusing more on costs given the uncertain macro environment. Accenture provides end-to-end services and can capture entire opportunity from generating cost efficiencies through leverage of technology and using it to invest in change programs.

Key highlights of earnings call

} Clients with US$100 mn+ bookings. Accenture had 18 clients with U$100 mn bookings in 3QFY22, taking the total to 74 YTD which is 20 higher than the similar prior period.

} Strong market share gains. Accenture grew 3X of the market. Growth in Europe was led by double-digit growth in Germany, the UK, France and Italy. Growth markets were led by double-digit growth in Japan and Australia.

} Spend on M&A. Accenture has reduced M&A spends to US$2.5 bn in FY2022E from US$4 bn earlier due to delay in closing of acquisitions, US$1 bn of which is expected to close in 1QFY23.

} Bookings. Bookings of US$17 bn were aligned to management expectations. The pipeline is strong.

} Sustainability. Accenture acquired three companies in 3QFY22 to enhance capabilities in sustainability services.

} Balanced growth. Both consulting and outsourcing revenues will report healthy growth in 4QFY22. Pipelines for both the segments are healthy.

} Clients are focused on both costs and growth. In certain industries like consumer, there is more focus on costs than a year ago. Cloud, data and AI continue to be key focus areas. Energy efficiency, supply-chain resilience, cost reduction, cybersecurity are focus areas for clients in Europe.

} Pricing. Accenture is able to get decent improvement is pricing. Higher pricing is the biggest margin lever. Margin tailwinds including pricing increases continue to lag compensation increases.

} Attrition. Uptick is attrition is in line with seasonal patterns. Attrition can increase further in 4QFY22 due to seasonality.

} Others. Captive care-out opportunities have been steady for the past couple of years.

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