Summary
- Accenture lowered its guidance for 2020 in light of ongoing virus pandemic.
- This new environment should speed up customers' projects in the virtualization and digital transformation areas with participation of Accenture.
- Accenture is a quality stock and remains an interesting pick in the IT services industry and the broader technology sector.
Accenture (NYSE:ACN) reported earnings and revenue above estimations but lowered the guidance for 2020, taking into consideration the impact of coronavirus pandemic. This review in the guidance was largely expected and just reinforces the devastating potential effect of ongoing virus pandemic in the coming months and also the uncertainties regarding the developments that lie ahead.
On the bright side, I see that Accenture can benefit from the necessary changes in business operation toward a virtualized work environment. On top of that, based on Accenture’s solid financial figures, I remain confident to have this company as one of my core holdings in the technology sector.
Q2 2020 Earnings Highlights
Accenture's revenue was $11.14 billion in the quarter, 0.4% above estimates and up 6.6% over a year ago in U.S dollars. This growth was led by high single-digit growth in strategy and consulting services and double-digit growth in operations, as well as broad-based strength across operating segments, especially Health & Public Service and Products, both with roughly 10% growth. North America and Growth Markets grew near 10% during the period, offsetting mute performance in Europe, primarily driven by a decline in the UK.
Gross margin came in 30.2% in the quarter, compared to 29.2% over a year ago, and SG&A expenses was slight above last year. As a result, operating margin was up 10 bps at 13.4% and EPS were $1.91, 10% above expectations and also up 10% over a year ago.
Looking ahead, new bookings still illustrate a positive picture, with record $14.2 billion in the quarter and book-to-bill of 1.3. Furthermore, Accenture continues to add new capabilities through new acquisitions, such as Mudano, a strategic data consultancy to U.K. financial services firms, Symantec's Cyber Security Services business and VanBerlo, a product design and innovation agency. Plus, besides nearly $600 million spent over the last 6 months, Accenture intends to invest up to $1.6 billion in further transactions still in this fiscal year.
Business Outlook
Accenture has demonstrated business strength, with solid top line growth in recent years. While new bookings suggest this momentum could persist, we all know that recent coronavirus outbreak poses a huge challenge for the whole economy, hence affecting the company as well.
While temporary lockdowns can cause a deep impact in the economic activity and corporations normal operations, Accenture is also expected to be able to mitigate it to some extent as a significant portion of Accenture’s staffs are already experienced in working virtually, as the company has deployed at scale remote collaboration technologies. Besides, this new environment should also speed up customers' projects in the virtualization and digital transformation areas with participation of Accenture.
Based on this new scenario, Accenture's management team has pointed out potential impacts for the company during 2020 fiscal year, such as the decline of the travel reimbursement revenue and the repercussion in some particular customers from most affected industries, like travel and automotive, for example.
While the magnitude of these headwinds are of course difficult to predict at this point in time, Accenture expects that it will cause the revenue growth for fiscal year 2020 to be in the range of 3% to 6% in local currency, against 6% to 8% originally forecast. In addition, operation margin is expected to be in the range of 14.7% to 14.8%, which is still an expansion of 10 to 20 bps over last year, but lower than the original forecast of 10 to 30 bps.
