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Steady start to the year: Accenture (ACN) reported revenue of USD16.2bn, up 3% YoY (1% in LC) in Q1FY24. Revenue was slightly higher than the mid-point of the company’s guidance of -2% to 2% (in LC). 5 of the 13 industries grew in mid-single digits or higher in Q1. Consulting revenue was flat YoY at USD8.46bn (-2% in LC), while revenue from Managed Services/Outsourcing grew 6% YoY to USD7.77bn (+5% in LC). ACN posted very strong double-digit growth in security, strong double-digit growth in Cloud and Industry X, and double-digit growth in Song during Q1. Strategy and Consulting reported a mid-single-digit decline, while Technology posted mid-single-digit growth, and Operations stood flat YoY. New bookings stood at USD18.4bn (up 14% YoY; book-to-bill at 1.1x). Consulting bookings stood at USD8.6bn (up 6.3% YoY; book-to-bill at 1x) and Managed Services bookings stood at USD9.8bn (up 21.2% YoY; book-to-bill at 1.3x). The company reported over USD450mn new bookings in Generative AI. Adjusted operating margin expanded by 20bps YoY to 16.7% in Q1. Quarterly annualized voluntary attrition stood at 11% in Q1 vs. 14% QoQ/13% YoY. Total headcount grew by 10,222 QoQ to 743,041 employees (1.4% QoQ/0.7% YoY).

Weakness in CMT persists: Q1 revenue growth was led by Health and Public Services (12% in LC YoY), Resource (6%), and Products (1%), while Financial Services stood flat YoY. CMT declined sharply by 11% YoY. Geography wise, North America declined by 1% in LC due to the dip in Communication and Media, Software Platforms, and Banking and Capital Markets, partially offset by growth in Public Services. EMEA grew 2%, led by growth in Public Services and Banking and Capital Markets, partially offset by the decline in Communications and Media. Growth Markets grew 5%, led by growth in Chemicals and Natural Resources, Public Services, and Banking and Capital Markets.

FY24 guidance: ACN has retained its LC revenue growth of 2-5% in FY24 (inorganic contribution of more than 2% now from ~2% earlier). The guidance assumes no foreign exchange impact on reported USD revenue. The company also retained its GAAP operating margin guidance of 14.8-15.0%. Adjusted operating margin, which excludes ~USD450mn of business-optimization costs in FY24 and USD1bn in FY23, is expected to expand 10-30bps to 15.5-15.7%. ACN expects Q2FY24 revenue to be USD15.4-16 bn (- 2% to 2% LC), assuming a negative 0.5% forex impact. The company expects OCF and FCF to be USD9.3-9.9bn and USD8.7-9.3bn, respectively, in FY24.

Earnings Call KTAs: i) Macro and geopolitical uncertainties have slowed the pace and level of client spending for smaller contracts with a shorter duration, especially for consulting services. ACN is also experiencing reduced demand, particularly in CMT. ii) Growth in H2 is expected to accelerate because of investments made in high-growth areas and anticipated ramp-ups of large deals. iii) The company had 30 clients with quarterly bookings greater than USD100mn, with over half in North America. iv) It closed 12 acquisitions in Q1 for a total of USD788mn in strategic areas across geographies. v) GenAI demand continued to accelerate in Q1 with over USD450mn in new bookings. vi) The pace of spending continued to be impacted by macro uncertainties; however, management believes the industry’s fundamentals remain intact. vii) UK remains weak and faced greater challenges than management’s expectations. ACN plans to diversify it from higher exposure to Banking and Capital Markets currently and pivot to more growth in other areas, aided by acquisitions. viii) ACN has not built any material improvement in discretionary spending and the macro environment in FY24 revenue growth guidance. Guidance assumes mid-to-high single-digit growth in Managed Services and low-single digit in Consulting. ix) ACN continues to see significant demand in cloud migration and modernization, modern ERP, Data and AI, and platforms and security. It further highlighted that only 40% of the enterprise workloads are in the cloud, of which only 20% are modernized, with huge opportunities there in the market.

Read through for Indian IT peers: ACN’s performance and commentary are broadly in sync with its Indian peers, suggesting no material improvement in the demand environment with macro uncertainties persisting. NIFTY IT has rallied ~9% in the last 1M, with the majority of this rally coming after the Fed’s dovish stance on rate hikes post easing inflation data and likely trajectory. Stable macros and dovish stance reduces the risk to our/consensus FY25 estimates of high single-digit revenue growth in Tier-1 companies, which builds some improvement in discretionary spending. We believe large caps offer a better risk-reward compared with mid-caps. Our pecking order is INFO, WPRO, TECHM, HCLT, LTIM, and TCS among Tier-1 companies.

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