Accenture: Two Options Ahead

Although it has traditionally been a nimble player in a competitive market, Accenture again stumbled as it ended the first half of a rather depressed fiscal year. Not only were the Q2 results slightly lower than the company’s outlook, but Accenture also reduced its outlook for the entire fiscal year.

Accenture’s revenues for the quarter ended February fell 6% to $5.27 billion from $5.61 billion a year ago. Analysts were estimating revenues of $5.54 billion in the quarter. Accenture had earlier estimated revenue in the range of $5.45-$5.65 billion and blamed the shortfall on the worsening economy and currency movements. In local currency, revenues had grown 3%.

By segment, Consulting revenues fell 10% to $3.03 billion while Outsourcing revenues fell a mere 1% to $2.24 billion. The resources group grew 14% and public services 12% in local currency terms.

By region, revenue from the Americas declined 1% in US dollars while in EMEA they decreased 13% in US dollars and grew 1% in local currency terms. In Asia-Pacific, revenues grew 10% in US dollars and 13% in local currency terms.

EPS of $0.63 a share was a cent shy of the previous year’s EPS but managed to exceed the market’s expectations of $0.62.

Most clients are cutting their IT budgets in reaction to the market conditions, making it difficult for any vendor to make very clear projections for the coming quarters. Some clients have started deferring decisions about new work, thus slowing down the pipeline; others have reduced the flow of small extensions and add-ons. There are others who are asking vendors such as Accenture to work with them to reduce the run rate on existing consulting projects.

Accenture feels that companies are rethinking priorities and evaluating projects based on their immediate return on investment, thus deferring large new transformational IT projects and turning to outsourcing to lower their costs. Outsourcing does offer immediate cost-saving benefits on account of labor arbitrage; however, as a long-term strategy outsourcers need to offer SaaS-enabled solutions, an emerging trend. Accenture itself saw bigger custom projects being delayed, while demand for SAP and Oracle services grew.

The company is also seeing strong demand in application outsourcing, as this is an area with opportunities for near-term cost reductions. As an example, earlier this week Accenture announced the launch of an enhanced claims, underwriting and policy administration solution designed to help property and casualty (P&C) and life insurers reduce costs and streamline processes. Accenture’s products do help it win over many other Indian IT vendors, who have not created productsor SaaS.

Within the BPO segment, Accenture saw significant demand in finance and accounting and procurement. Technology consulting continued to grow with demand for services related to IT infrastructure cost reduction, compliance, data security and data privacy.

Despite these bright spots, Accenture lowered its full-year revenue forecast to 0-4% growth from 6-10% previously. The company is forecasting Q3 revenues in the range of $5.1-$5.3 billion. It also lowered its EPS outlook for the full year to $2.60-$2.67 from $2.78-$2.85.

After the results announcement, the stock fell 6% to close at $31.96. It has further slipped and is currently trading at $28.02 with a market capitalization of $20.1 billion.

One of several things are likely to happen next. Either Cisco will try to acquire Accenture, trying to compete with HP and IBM, or Accenture itself needs to embark on a SaaS and SaaS-enabled BPO roll-up (Sabrix, InsideView, Salary.com, etc.).

This segment is a part in the series : Accenture