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Steady Q1 operating performance: Accenture’s (ACN’s) revenue rose by 5% YoY to USD15.7bn (15% in local currency or LC) in Q1. Revenues were ~USD150mn above the upper end of the guidance, after adjusting for forex. Management indicated that 10 of the 13 industries grew in double-digits and the remaining three in a high-single digit, in Q1. ACN continues to gain market-share (growing more than two times the market), driving performance in line with its guidance. Q1 also saw ACN posting double-digit growth in Song and very strong double-digit growth in Cloud, Industry X, and Security. Strategy and Consulting reported low single-digit growth, while Operations and Technology reported double-digit growth and strong double-digit growth, respectively. Consulting revenue grew ~1% YoY to USD8.4bn (10% in LC), while managed services/outsourcing revenue grew ~11% YoY to USD7.3bn (20% in LC). New bookings in Q1 stood at USD16.2bn (down ~3% YoY; book-to-bill: 1.0x). Consulting bookings stood at USD8.11bn (down ~14% YoY; book-to-bill: 1.0x) and managed services bookings also stood at USD8.11bn (~10% YoY; book-to-bill: 1.1x). Operating margin increased by 20bps YoY to 16.5% in Q1. Quarterly annualized voluntary attrition moderated to 13% in Q1 vs 20% QoQ. The company added 16,340 employees in Q1, taking the headcount to 737,719 (2.3% QoQ/9.4% YoY).

Double-digit growth across verticals and geographies: Growth in Q1 was driven by Resources (21% YoY in LC), Products (15%), Health & Public Services (15%), Financial Services (13%), and CMT (11%). Geography-wise, North America grew by 11% in LC, Europe by 17%, and Growth markets by 19%.

Retains FY23 guidance: ACN retained its revenue growth guidance of 8-11% in LC, in FY23 (organic growth: 5.5-8.5%). The guidance assumes a negative 5% (earlier, negative 6%) foreign exchange impact on USD revenue. Operating margin is expected to expand by 10- 30bps to 15.3-15.5%. ACN expects Q2FY23 revenue at USD15.2-15.75bn, assuming the negative 5% foreign-exchange impact (6-10% YoY in LC). The company expects OCF and FCF to clock at USD8.5-9bn and USD7.7-8.2bn, respectively.

Earnings call takeaways: i) ACN expects consulting to grow in a high single-digit and managed services to grow in double-digits, in FY23. ii) The company believes that the current macro conditions are signaling to clients that they need to change more, not less. iii) The company indicated softness in demand in the retail, consumer goods and CMT segments. iv) Clients are seeking compressed transformation amid uncertainties, to achieve lower costs, more agility and greater resilience; thus, managed services have become increasingly important as companies are looking to move faster, for leveraging digital platforms and talent. v) Management expects a slight decline in Strategy & Consulting in Q2, due to less revenue from smaller deals and likelihood of growth recovering in H2. vi) Management highlighted that it is witnessing some delay in decision-making, pausing of smaller deals, and slower pace of spending. vii) ACN has signed deals worth >USD100mn with 24 clients in Q1 (vs 26 clients in Q4). viii) New bookings continue to see improved pricing and the company expects strong order booking in Q2. ix) Company invested USD686mn in acquisitions in Q1. x) FY23 revenue growth guidance assumes ~2.5% contribution from M&As.

Read-through for Indian IT peers: ACN’s Q1 operating performance was better than guidance, although the degree of outperformance was much lower compared with Q1 last year. Despite the Q1 beat, the company retained its revenue growth and margin guidance on the back of anticipated weakness in Q2. ACN expects growth to improve in H2, on account of expected revenue conversion from high-impact transformational deals. Management indicated that wage inflation remains higher, but uptick in pricing and moderation in attrition (seasonal factors and easing supply situation led to attrition returning to the pre-COVID Q1 range) should augur well for margins. Amid macro uncertainties, clients are turning cautious, leading to a slower pace of spending, delay in decision-making, and pause in smaller deals – this would constrain the near-term growth trajectory. Demand has clearly moderated due to macro weakness, but remains resilient; this should alleviate any concerns of sharp fall in demand. We prefer WPRO, TECHM, INFO, HCLT and TCS in the tier-1 space; and ZOMATO, MPHL, BSOFT, FSOL, and PSYS among mid-caps.

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