IT Sector Update - Accenture`s 1QFY24 commentary points to unchanged demand environment By Motilal Oswal
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Accenture’s 1QFY24 commentary points to unchanged demand environment
Good deal wins, but weak Q2 outlook remains near-term overhang
Accenture (ACN), a key peer of Indian IT services companies, reported 1QFY24 revenue growth of 1.0% YoY CC, at the upper end of the company guidance and a little above Bloomberg consensus. But it continues to guide for near-term weakness, with Q2 revenue growth guidance of flat YoY growth at mid-point being below consensus expectations. The company is maintaining its FY24 revenue growth guidance of 2-5% YoY CC, suggesting a potentially improved 2HFY24. However, this projection is partially influenced by the inorganic impact stemming from acquisitions (200+bp YoY). Management commentary suggested ongoing weakness in discretionary spend, which we expect to be echoed by its Indian IT peers as well. On the other hand, good deal booking in 1Q (up 10% QoQ) was driven by outsourcing. This, along with a positive outlook on pipeline, should provide some comfort on FY25 for IT services companies. We see the continued weakness in CMT as an ongoing overhang on Tech Mahindra (c40% Comm. exposure).
Earnings snapshot – Inline Q1 performance, FY24 Guidance maintained
? Inline revenue performance: Revenue stood at USD16.2b (up 1.0% in CC/3.0% in USD YoY) in 1QFY24, 20bp above the consensus. Managed services revenue grew 5% YoY CC (the slowest in last 12 quarters), while consulting services continue to see a decline of 2% YoY CC.
? Booking recovered in Q1: ACN reported outsourcing bookings at USD9.8b, up 21% YoY, while consulting bookings grew 6% YoY to USD8.6b.
? Revenue guidance maintained: ACN expects 2QFY24 revenue growth at -2% to +2% YoY CC, while FY24 revenue growth maintained at 2-5% in CC. The FY24 revenue guidance includes more than 2% inorganic contribution. ? Good operating margin performance: Adjusted EBIT margin rose 20bp YoY to 16.7% in 1Q, beat consensus by 30bp YoY in Q1. FY24 margin consensus remains at the middle of the guidance band of 15.5-15.7%.
? Attrition moderated meaningfully: ACN added 10k employees in 1Q, while attrition moderated substantially by 200 YoY/300 QoQ bp and utilization rates stabilized at 91%.
Managed services growth to outpace consulting services growth
? Managed services to outperform Consulting: The management is optimistic regarding the growth potential of managed services, evident from robust bookings this quarter with a BTB ratio of 1.4x. It remains committed to achieving mid to high single-digit growth for managed services. However, consulting services are experiencing an impact due to reduced discretionary spending and project reprioritization.
? Macro headwind continues to weigh on growth: ACN has not witnessed any meaningful change in the spending pattern of enterprise clients. It continues to maintain caution which is leading to slower decision-making and higher deal scrutiny. The revenue conversion for small-size deals remains slow, while execution for large deals remains fairly strong.
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