Technology: Accenture FY2018 guidance signals no change in demand trend - Kotak

Accenture has guided 5-8% constant-currency growth for FY2018 (August year-ends), no different from FY2017. FY2018 guidance assumes higher contribution from acquisitions, though. Overall, Accenture guidance indicates status quo on demand environment as compared to FY2017, something which cannot be termed as positive for Indian IT. The silver lining for Indian IT is that demand for Accenture seems to be shifting to applications and operations from strategy and consulting revenues, perhaps an indication of movement in digital demand from consulting to implementation / integration opportunities.

Accenture 4QFY17-strong growth overall; outsourcing business strong

Accenture reported c/c revenue growth of 8% yoy for the August 2017 quarter (Accenture has August financial year-end). Revenue growth was at the upper end of the guidance band. Revenue growth was robust in the products vertical at 10% in c/c, while it was still muted at 4% in health and public services. Financial services and communication, media & technology growth was strong at 9% and 7% respectively. Strong growth in financial services is a surprise noting that Indian IT has indicated lull in spending as the primary reason for a weak FY2018E. New bookings grew 12.2% yoy to US$10.1 bn, of which outsourcing bookings grew at strong 19%. Outsourcing business growth outpaced consulting growth for the third consecutive quarter.

FY2018 revenue growth guidance of 5-8% in c/c similar to beginning of FY2017

Accenture guidance broadly implies no material change in the demand environment compared to FY2017. Moreover, Accenture FY2018 revenue growth guidance builds in 2.5-3% from acquisitions as compared to 2% in FY2017. Indian IT is banking on improvement in demand environment (especially in financial services) to hope for a better FY2019E after disappointments and likely soft growth in FY2018E. Accenture guidance fails to provide that comfort.

NEW (digital, cloud and security services) constitutes more than 50% of revenues

NEW services grew over 30% and contributed 50% to Accenture revenues in FY2017, up from 40% in FY2016 and 30% in FY2015, indicating a rapid transition away from legacy services. Aiding this transition is use of acquisitions; Accenture spent US$1.7 bn on 37 acquisitions in FY2017 (indicating average acquisition size of US$46 mn). The company has allocated US$1.1-1.4 bn to acquisitions in FY2018. Acquisitions are important to beef up skills, ease off time-to-market pressure and accelerate transition of the business model towards digital services. This is an area where Indian IT can pay more attention to.

Silver lining for Indian IT from Accenture commentary

Accenture's FY2017 revenue growth in strategy & consulting services was in low-single digit (flat in 4QFY17) while application services and operations grew in high single and double digits respectively. We note that application services is a large portfolio of business for Indian IT that has seen perceptible slowdown in growth rate with fears of secular decline in this service offering. Accenture management indicated that faster growth, especially in applications, is due to increase in implementation revenues as compared to early stage development cycle prevalent for strategy & consulting work. We would watch this dynamic closely as the strength of Indian IT is in the applications space, an area that has suffered due to reallocation of client spends towards consulting in the past two-three years. Any broader shift in the market towards implementation work can have positive impact on the growth of Indian IT.

Another silver lining is Accenture management commentary wherein it expects better incremental contribution to growth from North America as compared to FY2017. We note that growth from North America was a modest 4% in FY2017 for Accenture.

Per person metrics continue to be under pressure

Revenue/employee (ttm) declined 2.8% yoy to US$86,191, while EBIT/person was down 2% to US$12,720. The decline is steeper at 12% and 9% for revenue/employee and EBIT/employee when compared to the numbers two years ago. The broader trend of shift of operations to low-cost locations and currency headwind is the larger reason over the past two years, but the decline should have been lesser noting-(1) faster growth in consulting and higher realization in digital services and (2) benefits of automation in traditional services.

Source : Equity Bulls

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