What To Expect From Accenture Plc (NYSE:ACN) In 2016?
Accenture Plc (NYSE:ACN) reported a mixed F1Q2016 in which EPS contracted from the previous year and also missed the consensus estimate. The topline number was however inspiring as revenue rose slightly from a year ago and also exceeded the consensus target.
Intense competition, adverse forex movements and weak IT spending environment were some of the headwinds that Accenture encountered in the last quarter. However, secular technology shifts and a superior brand saved the day for Accenture.
Accenture’s main business segments are Consulting and Outsourcing. The majority of the company’s revenues come from Consulting at about 50-55% of the total. Outsourcing business contributes roughly 45-50% of total revenue.
Although a global player, North America is Accenture Plc (NYSE:ACN)’s primary market, accounting for about 45% of total sales. The EMEA region generates roughly 35% of sales and other emerging markets, which are captured as Growth Markets, contribute 20% of sales.
In an effort to expand rapidly and diversify revenue streams, Accenture Plc (NYSE:ACN) is fond of buying growth. In any given year, the company acquires several assets, which immediately boost revenue or bring technology that it can leverage to drive product/services differentiation.
In 2015, Accenture acquired no less than 21 companies. Its most recent major acquisition is CRMWaypoint, a provider of cloud technology whose offerings fit in the SaaS bracket. Accenture didn’t disclose how much it paid for CRMWaypoint, but there is no doubt that the acquisition is a strategic fit. Opportunities in SaaS and adjacencies are huge and growing. Data from Centaur Partners shows that SaaS and cloud-based enterprise application market will reach $32.8 billion this year from $13.5 billion back in 2013. The market is projected to grow further over the next few years as more businesses migrate their systems to the cloud to enable them operate more effectively and efficiently.
With CRMWaypoint under its armpit, Accenture is poised to take advantage of the anticipated exponential growth of SaaS and related markets.
Accenture’s other recent acquisition is Formicary. As with CRMWaypoint, Accenture didn’t reveal how much it paid to purchase Formicary. However, the company is known as a provider of technology that support trading platforms and its clients are scattered across the U.K. and North America. The acquisition of Formicary is expected to strengthen Accenture’s offerings to banks, hedge funds, clearing organizations and other financial services players.
Last quarter highlight
Accenture Plc (NYSE:ACN) posted EPS of $1.28 in F2Q2016, missing the consensus estimate of $1.32 and also falling short of it’s a year ago EPS of $1.29. Revenue of $8.47 billion for the quarter surpassed the consensus estimate of $7.89 billion and also rose 0.5% YoY.
For the current quarter (F3Q2016), the management is guiding for revenue in the band of $7.50 – $7.75 billion. About 2% of the fiscal 2016 total revenue is expected to come from acquisitions, because among Accenture’s recent acquisitions are business that already generate some revenue.
Accenture finished F2Q2016 with more than $3 billion in cash balance, offset by just $25.8 million of long-term debt.
Governments around the world are inspiring technology adoption in a range of sectors through regulatory changes. Because of regulatory requirement and increasing awareness about the benefits enterprise cloud and mobility, more businesses are paying for consultations to enable them deploy these technologies smoothly. The trend creates impressive growth opportunity for Accenture Plc (NYSE:ACN), especially in the emerging markets, which the company aptly calls Growth Markets.
Favorable offshoring trends
Low-cost labor in the emerging economies is driving outsourcing and offshoring in developed economies. It is said that a company can save up to 70% in operating costs by outsourcing work to places like India. The global outsourcing/offshoring trends are tailwinds for Accenture.
Accenture Plc (NYSE:ACN) is not only the world’s largest independent consultant, but the company has successfully built a strong brand name for itself. Additionally, the company typically invests to strengthen client relationship. Accenture’s brand and reputation are key competitive advantages.
Accenture Plc (NYSE:ACN) has not only succeeded in building a name for itself, but the company has also over the years build a strong portfolio of IT services and solutions, partly through acquisitions. Because of its diverse offerings, Accenture is capable of delivering end-to-end solutions where the less diversified competitors cannot. Because of its strong brand name, once Accenture displaces a competitor in a deal, it is almost impossible to dislodge it and that explains its consistent revenue growth.
Opportunity to expand margins
Compared with large competitors, Accenture Plc (NYSE:ACN) seems to have greater headroom to expand margins. For example, the company’s margins are currently below those of Hewlett Packard Enterprise Co (NYSE:HPE) and the International Business Machines Corp. (NYSE:IBM). Continued share gain, revenue growth and disciplined cost administration should allow for margins improvement at Accenture over the long-term.
Accenture Plc (NYSE:ACN) returns value to shareholders through shares repurchase and dividends. The company pays biannual dividend of $1.10 per share. It also actively buys back its shares.
Slow pace of regulatory adjustments
Although governments are changing regulations to allow for greater technology penetration in range of industries, regulation-inspired growth of IT will largely depend on the pace of favorable regulatory adjustments.
Politics in offshoring
As much as businesses are making huge savings outsourcing work to low-cost countries, the practice could soon or later begin to face political hurdles. Some politicians in developed countries are not comfortable with the practice of giving away jobs when unemployment rates are rising locally. Although total ban of offshoring may not happen, the space of offshoring could be greatly reduced, thus narrowing revenue opportunity for Accenture and others that thriving in outsourcing/offshoring market.
Unfavorable economic fluctuations
Spending on discretionary IT services greatly depends on the overall health of the economy. Global economic turbulences have always limited IT spending and the opposite is true. For a company like Accenture whose offerings span discretionary IT offerings, economic slowdown can greatly hamper topline and bottom-line growth.
Delicate brand position
As much as Accenture Plc (NYSE:ACN)’s strong brand and reputation are key competitive advantages, they also present risk. The company must zealously protect its identity, because any action by employees or outsiders that taints the reputation of the company can cause untold damage to the business and the stock.
Because Accenture Plc (NYSE:ACN) is greatly exposed to international markets, the company is constantly faced with the risk of adverse foreign exchange movements. There is little Accenture can do to eliminate this threat. In any case, it will only increase as the company expands abroad.
Competition is everywhere in Accenture’s industry. Because of intense competition, Accenture cannot rest at ease. The company has to constantly innovate to differentiate its services/solitions to protect its market share and create room for continued revenue growth. However, not every dollar that goes to R&D brings favorable results.
Accenture Plc (NYSE:ACN) looks poised for continued growth in 2016, but success or failure will largely depend on management execution.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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