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Morningstar | Accenture Reports Strong End to FY18, Issues Mostly In-Line FY19 Guidance; Shares Above Fair Value

Accenture reported a strong finish to the end of its fiscal year, with total net revenue growing in the low double digits year over year. The firm’s strong performance continues to be fueled by its early and aggressive shift to its “New” services, which includes digital, cloud, and security-related IT services. About two years ago, we had forecast the rotation to digital services (or social, mobile, analytics, cloud, and security services) as long-term drivers for the IT services industry, with Accenture as a market leader. We continue to see this long-term thesis play out with Accenture commanding a dominant position in digital and outperforming the overall market. To that end, for the full fiscal year, Accenture’s new services accounted for about $23 billion, or roughly 60% of its total revenue, growing close to 25% year over year and representing more than double its new revenue from three years ago. We see this theme continuing and forecast healthy long-term growth. In terms of expectations, management provided a slightly weaker-than-expected top-line growth assumption due to negative foreign exchange effects of 2.5%, although on a local currency basis, their 5%-8% revenue guide was in line with our expectations. Our operating margin outlook remains unchanged, and we see ongoing 10-30 basis point expansion per year. After rolling our financial model forward to account for the new year and taking the time value of money into account, we modestly raise our fair value estimate to $145 from $138 and maintain our wide economic moat rating. With shares trading above our fair value, we’d seek a wider margin of safety before investing new capital in the name.

For the quarter, net revenue grew 11% year over year to $10.1 billion in both local and U.S. dollars. By business dimension, growth was balanced with strategy and consulting, operations, and application services all growing in the double digits. However, by sector, growth was more inconsistent. Health and public service, or H&PS, and financial services were laggards as H&PS was pressured by weakness in the U.S. federal business, while financial services saw challenges in Europe. We expect these issues to remain for the coming first half of the fiscal year. On the bookings front, we were encouraged by the company’s second-highest recorded bookings on record of $10.8 billion and remain particularly positive on the firm’s strong consulting business, which saw a book-to-bill of 1.1 times. We expect consulting to experience a long growth tailwind with demand for digital services requiring greater hands-on consulting expertise.

Accenture’s operating margin increased 10 basis points year over year to 14.3%, in line with our expectations and we continue to expect the margin to grow in the region of 10-30 basis points over our explicit five-year forecast. Our expected margin performance reflects management’s conservative margin aspirations and solid historic execution.