Accenture Earnings: Outlook Subdued as Customers Remain Cautious on Spending; Lowering Our Valuation

Wide-moat Accenture ACN reported relatively solid fourth-quarter results, but the outlook for fiscal 2024 was mild as the firm is baking in a continuation of the current macroeconomic environment, leaving discretionary consulting spending more muted than expected. As a result, we are lowering our fair value estimate to $247 per share from $258 per share. While shares are down roughly 6% upon the news, we still find the market for Accenture stock to be rich. While we don’t deride the opportunity ahead for this IT services powerhouse, especially in implementing the new wave of technologies, such as generative AI, we think it will be hard for the firm to expand GAAP operating margins past 110 basis points over the next five years as delayed consulting work pushes out net new managed services work, affecting scale and thus operating leverage.

Accenture’s fourth-quarter revenue increased 4% year over year in USD to $16.0 billion. Fourth-quarter consulting revenue decreased 2% year over year in USD to $8.2 billion, as managed services revenue grew 10% year over year in USD to $7.79 billion. While managed services helped Accenture weather consulting weakness, its growth still marked a year-over-year deceleration of 6 points, which we think is due to an effect from slowed consulting revenue pushing out managed services work, which is the reason for our moderate fair value estimate cut.

The quarter’s GAAP operating margin of 12% marked a contraction from 14.7% from the prior-year period, resulting from restructuring costs weighing on profitability in the near term. Affected by weak consulting revenue and reorganization costs, GAAP EPS was $2.15 compared with $2.60 in the prior-year quarter.

For fiscal 2024, the firm expects revenue growth between 2% and 5% in local currency. Accenture expects its GAAP operating margin to be in the range of 14.8%-15%, leading to diluted EPS between $11.41 and $11.76. We think these are fair assumptions because of overall customer caution.