Friday, March 24, 2023

Information Technology: ACN’s Q2 Results’ Read-Through: In-Line Q2, Record-High Bookings; Narrows FY23 Guidance

Steady Q2 operating performance: Accenture’s (ACN’s) revenue grew by 5% YoY to USD15.8bn (9% in LC) in Q2. Revenues, after adjusting for forex, were closer to the upper end of the guidance (6-10% in LC), driven by broad-based growth across all markets, with over 50% of the 13 industries growing in double-digits in Q2. ACN continues to gain market-share (growing >2x the market). Q2 also saw ACN posting strong double-digit growth in Song and very strong double-digit growth in Cloud, Industry X, and Security. Strategy and Consulting reported a mid-single-digit decline, while Operations and Technology logged double-digit growth. Consulting revenue declined by ~1% YoY to USD8.28bn (up 4% in LC), while revenue for Managed Services/Outsourcing grew ~12% YoY to USD7.54bn (16% in LC). New bookings were at a record high in Q2, standing at USD22.1bn (up 13% YoY, 17% in LC; book-to-bill at 1.4x). Consulting bookings stood at USD10.7bn (down 2.4% YoY; book-to-bill at 1.3x) and Managed-Services bookings clocked USD11.4bn (up 32% YoY; book-to-bill at 1.5x). Adjusted operating margin increased by 10bps YoY to 13.8% in Q2. Quarterly annualized voluntary attrition moderated to 12% in Q2 vs 13% QoQ. The company added 484 employees in Q2, taking the headcount to 738,143 (0.1% QoQ/5.7% YoY).

Broad-based growth across verticals and geographies: Growth in Q2 was driven by Resources (16% YoY in LC), Health & Public Services (15%), Financial Services (10%), and Products (9%), while CMT was flat YoY. Geography-wise, North America grew by 5% in LC, led by public services and health & utilities, and partially offset by the decline in CMT; Europe grew by 12%, led by industrial, banking & capital markets and public services; and Growth markets saw a 14% rise, led by banking & capital markets, chemicals & natural resources, and public services.

Management narrows FY23 guidance: ACN narrowed its revenue growth guidance to 8-10% in LC for FY23 (earlier 8-11%), assuming inorganic contribution of 2% now compared with 2.5% earlier. The guidance prices-in a negative 4.5% (earlier at negative 5%) foreign-exchange impact on USD revenue. ACN expects operating margin to be 14.1-14.3% (earlier 15.3-15.5%). Adjusted for one-off business optimization costs of ~USD800mn in FY23, it estimates operating margin at 15.3-15.5% (10-30bps expansion from FY22). ACN expects Q3FY23 revenue at USD16.1-16.7bn, assuming a negative 3.5% foreign-exchange impact (3-7% YoY in LC). The company now expects OCF and FCF to clock at USD8.7-9.2bn (earlier USD8.5-9bn) and USD8.0-8.5bn (earlier USD7.7-8.2bn), respectively.

Earnings-call KTAs: 1) Clients are seeking compressed transformation amid uncertainties, in order to achieve lower costs, more agility and greater resilience; thus, managed services has become increasingly important as companies are looking to increase pace, for leveraging digital platforms and talent. 2) Company is experiencing growing demand in application modernization & maintenance, cloud enablement and managed security services. 3) ACN has signed deals worth >USD100mn with 35 clients in Q2 (vs 24 clients in Q1). The company highlighted that it is seeing traction in the bigger transformational projects. 4) Clients are laser-focused on costs and prioritizes projects with shorter RoI. 5) After record-high bookings in Q2, ACN expects bookings growth to be softer in Q3. The mix is currently skewed towards managed services; however, Mgmt highlighted that consulting has a strong pipeline. 6) ACN does not have significant exposure to regional banks and primarily caters to larger banking institutions. 7) It has initiated actions to streamline operations and transform non-billable corporate functions to reduce costs, and anticipates departure of ~19k employees (~2.5% of the workforce – over half in non-billable corporate functions) over the next 18 months. It expects total business optimization costs of ~USD1.5bn (USD0.8bn/0.7bn in FY23/FY24), which comprise ~USD1.2bn of employee severance and other personnel costs. Additionally, it expects to incur USD300mn in costs related to the consolidation of office space; majority of these will be recorded in FY23. 8) Company highlighted that pricing has remained relatively stable in Q2. 9) It expects flattish headcount addition in Q3, with some addition in Q4.

Read-through for Indian IT peers: ACN’s Q2 revenue growth was closer to the upper end of its guidance, although it came in short of the outperformance seen over the last few quarters. Company has retained the mid-point of its organic revenue growth guidance for FY23 (6-8% vs earlier 5.5-8.5%). The consulting business has seen moderation in both, deal intake and revenue growth, while managed services sustained its strong growth momentum (revenue/deal bookings grew 16%/37% CC YoY in Q2; book-to-bill at 1.5x). Deal booking remained strong in Q2 driven by large transformational deals, while clients are turning cautious amid macro uncertainties, leading to delay in decision-making and pause in smaller deals – this could lead to increased volatility in quarterly deal bookings and likely to narrowing of the growth differential between Tier-1 and Tier-2 companies. Demand has moderated due to weakness in consulting, softness in the flow of smaller deals and slower decision-making amid macro uncertainties; nevertheless, demand remains resilient and should alleviate any concerns of a sharp fall. We prefer large-caps over mid-caps, considering shift in the deal-mix and relative valuations. Our pecking order is INFO, WPRO, TECHM, HCLT and TCS in the tier-1 space; and ZOMATO, FSOL, ECLX, MPHL, BSOFT, and PSYS among mid-caps.

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