Accenture Earnings: Despite a Soft Quarter, Firm on Track for Future Upside

Wide-moat Accenture ACN reported fiscal 2023 third-quarter results that narrowly missed our expectations on revenue and operating margin. While the business continues to operate in a turbulent macroenvironment, we see its business optimization actions and investment in cloud and artificial intelligence as signals of strength. As we near the end of the fiscal year, management moderated its full-year guidance, revising down estimates for revenue growth and EPS. We are, however, confident in the firm’s ability to drive long-term future margin expansion, and therefore we maintain our $258 fair value estimate. Even with shares down around 3% after the earnings release, we continue to view the shares as overvalued.

Third-quarter companywide revenue was up 3% year over year to $16.6 billion. Consulting revenue declined 4% year over year to $8.7 billion as reported, largely affected by lesser volume in small-deal sales. Managed services (previously outsourcing) was a bright spot in the quarter, up 10% year over year, reaching $7.9 billion, as reported. New bookings were $17.2 billion in the quarter, up 2% year over year in U.S. dollars, with an equal mix of consulting and managed services bookings.

Gross margin for the quarter increased on a year-over-year basis to 33.4% from 32.9%. Operating margin declined 210 basis points year over year to 14.2% because of business optimization costs that we believe will be worth the short-term pain. The firm reported a utilization rate of 91% or higher and is on track to achieve lower cost objectives in fiscal 2024 and beyond. Adjusted earnings per share were $3.19 in the quarter, up 14% from the year-ago period.

For the fourth quarter, management expects revenue in the range of $15.75 billion-$16.35 billion. Management slightly adjusted the full-year outlook, now expecting revenue growth of 8%-9% in local currency (previously 8%-10%), operating margin of 14.2% (previously 14.1%-14.3%) and EPS of $10.94-$11.05 (previously $10.84-$11.06).