Accenture reported first-quarter results that were in line with expectations. First-quarter revenue grew 5% year over year on a constant currency basis to $7.22 billion. The outsourcing business had another strong quarter, which helped shore up the firm’s overall performance.
The consulting business continued its recent struggle, reporting flat year-over-year growth on a constant currency basis. Over the past three quarters, consulting growth languished at low-single-digit levels, and management’s comments indicate that this trend is likely to persist in the short term.
However, given this segment’s strong bookings, we believe growth is likely to bounce back in the second half of the current fiscal year. Consulting’s recent bookings consistently exceeded its revenue, indicating that this segment was able to replenish its pipeline at a healthy rate.
However, the delay in converting pipeline to revenue is the main reason behind the recent run of relatively poor numbers. Declines in small and medium-size consulting deals coupled with longer conversion times for some of the larger transformational deals have led to elongated conversion cycles in recent times.
Outsourcing, on the other hand, is on a solid run and has more than offset consulting’s poor numbers in recent quarters. During the quarter, outsourcing revenue grew 13% on a constant currency basis and extended its streak of consecutive quarters with double-digit growth to nine. Some of the main drivers behind outsourcing are IT operating cost reduction, a desire to turn fixed costs to variable costs, and a willingness to improve the IT effectiveness of the organization. In terms of geographies, Asia Pacific and Americas reported double-digit growth while revenue from Europe remained flat. Given that the European economy is in more trouble compared with the rest of the world, we weren’t surprised by these results.
Accenture’s operating margin came in at 14.5%, up 60 basis points compared with last year. The higher selling, general, and administrative expenses were more than offset by lower cost of services. As outsourcing grows, the company relies more on its global delivery network to deliver its services, which helps keep its employee expenses under control. We think it will be difficult for Accenture to maintain this level of margins if consulting bounces back, as consulting uses more onsite resources than outsourcing.
Accenture generated $7.5 billion in new bookings during the quarter, down 4% from last year. Consulting bookings remained flat while outsourcing bookings declined 8%. Outsourcing bookings tend to be lumpy, and hence we aren’t worried by the decline during the quarter.
Suggested Reading: Warren Buffett Quotes
