Accenture’s guidance narrowed down as growth moderates

23 Jun 2023 , 12:26 PM

Management indicated that revenues were impacted by lower than expected smaller deals. CAN lowered the top end of its FY23 revenue growth guidance to 8-9% CC YoY versus 8-10% CC YoY (inorganic contribution of ~2%). Q3FY23 guidance of 2-6% CC YoY, reflects further deceleration in growth as Consulting is expected to remain muted. Growth in Q3 continued to be led by managed services (+13% YoY CC) while consulting (-1% YoY CC) saw further moderation. Adjusted EBIT margin stood at 16.3% (+20bps YoY), and ACN now expects FY23 Adjusted EBIT margin to be ~15.4% (versus 15.3-15.5% previously). New bookings also moderated to USD17.25 billion (+4% CC YoY), with book-to-bill of 1.04x. Managed services bookings growth moderated to 6% YoY, while consulting bookings remained soft (-2% YoY). ACN highlighted that shorter strategy and consulting deals are likely to remain subdued, leading to lower near-term growth.

Comm, Media & Hi-tech sees sharpest decline

Among verticals, Healthcare & Public Services led the way, growing 14% CC YoY this quarter. Resources remained healthy at 12% CC YoY. Products and Financial Services saw moderation in growth to 6%/5% CC YoY while Communications saw a decline of 8% CC YoY. Management indicated that they saw lower than expected smaller deals, especially in strategy and consulting and system integration within service line and sharper than expected slowdown in Comm, Media & Hi-tech vertical. ACN also saw lower pricing in some areas of their business in the quarter.

New bookings moderate due to lower short cycle deals

New bookings growth for the quarter moderated to 4% CC YoY (+2% YoY in USD terms) to USD17.25 billion, reflecting moderating demand. In Q3, there were 26 clients (35 in Q2) with over USD100 million in bookings. Bookings growth for managed services moderated to 6% YoY while consulting bookings declined 2% YoY. Management indicated that they continue to expect bookings in a similar range in Q4. ACN expects FY23 adjusted EBIT margin to be 15.4% (was 15.3-15.5%).

Notables

• Growth in North America moderated to 2% YoY CC as strength in Public Services, Health and Utilities was offset by weakness in Comm, Media & Hi-tech and Banking. 
• Europe grew 7% YoY CC, led by growth in Industrial, Banking & Capital Markets and Public Services. Germany, France and Italy led growth. 
• Within services, Operations led growth with double digit growth while Technology and Strategy & Consulting grew by high single digits. 
• Attrition inched up to 13% in Q3 (versus 12% in Q2)
• ACN announced USD3 billion investment in AI, which includes doubling its data & AI workforce from 40k to 80k, expansion of its center for advance AI and developing new gen AI-powered industry solutions. ACN believes adoption of AI will lead to increased digital core transformations for enterprises, which is an opportunity similar to cloud.

Near term outlook cautious

Analysts at IIFL Capital Services believe ACN’s Q3 results and narrowed FY23 organic growth outlook of 6-7% CC YoY (versus 6-8% previously) combined with the moderation in managed services bookings highlights the headwinds in the near-term demand environment. This corroborates with the recent commentary from Indian IT service companies, which they believe could lead to a soft start to FY24. Analysts at IIFL Capital Services continue to prefer stocks within their coverage with either valuation comfort (INFO and TCS) or better growth visibility (PSYS and COFO), although they have limited upside across IIFL’s coverage from current levels.