Accenture Indicates Profound and Dramatic Shift At Clients, Shares Swoon

Accenture had its Q2-2009 conference call yesterday at 4:30pm and we summarize for you the key points of that call. Accenture’s stock fell 11% upon release of Q2-2009 earnings, although they beat the Q2-2009 EPS estimate by 1 cent (actual 63 cents versus consensus 62 cents), the revenue was less than expectations and the outlook for the third quarter and the year was lowered quite significantly. We were anticipating a Q2 beat, but certainly not expecting such a sharp decrease in out-quarters, and this we found was equally surprising to the company, analysts and investors. ACN dropped its revenue and EPS guidance for the year, citing uncertainty, FX headwinds and lack of visibility, which did not sit well with investors.

The conference call was very revealing, it demonstrated the depth and breadth of the global economic turmoil deep within companies. Accenture, which was riding high, and seemingly unaffected by this slowdown was caught unaware of the dramatic change in consulting environment from December, when things seemed fine, to January where clients were apparently in a state of shock, numbed and facing upto a very uncertain 2009.

KPMG was the last Big4 firm to report, and its full year 2009 ended September 2008, a full three months after the other Big4 firms reported their full year 2009 ending June 2009. KPMG’s revenue growth was a bit below the other Big4 firms as its year covered more months of the global crisis. Now we see Accenture talking about a “profound difference” between December 2008 and January 2009. And that just a month can make a huge impact on such a large and diversified company such as Accenture shows the enormity of what is going on in client companies.

The market today is lower as it digests the surprise from Accenture and ponders on implications for operating results and professional service companies.

We’ll summarize / paraphrase what each Accenture player had to say both in remarks and in answers to questions, some we have left verbatim as it just conveys better the emotions around what is happening in the marketplace:

Bill Green, Accenture Chairman & CEO

“…Accenture's second quarter was a solid one. Revenues were $5.3 billion, an increase of 3% in local currency. We grew operating income 6% and expand operating margin by 150 basis points, We delivered solid EPS of $0.63, and new bookings of nearly $6 billion. We continue to generate significant amounts of cash, and we have a very strong balance sheet with no debt.

At the end of the day, our visibility isn't any different than it's been. But, our predictability, right, is not as good as it used to be. The difference between December and January was profound. People came back to work after the holiday in January, and things just slowed down. Because if you would look at what happened from mid-December through the beginning of January as it relates to the economy, it was very profound. There was a whole lot going on. As people came back to work, people just took a pause. And the pause, that had been what we described last time was deer in the headlights -- became an institutional thing as everybody sat there uncertain about what direction the economy was going to go in.

Some of our clients -- they don't even have their '09 budgets finalized yet. If you think about that, really what we are trying to account for here is that -- the plain uncertainty -- the work hasn't gone anywhere. There is a lot of things to do. There are some people that have laundry lists of things they have to get at. People are just very uncertain out there. It was really a January, February, phenomenon, and it is uncertain sitting here right now to know, how that is going to thaw and play out. That's really the reason for the range that we put in there. Just because the client environment is just so unpredictable on a global and on an industry-by-industry basis, and we don't want to be surprised again.

And all that stuff just happened as people's mental models said we get '08 behind us, and as soon as people got into '09, I think they said we don't see '09 being much better. And in fact, it may be worse. And that was the light switch, if you will, that happened in January, and those were the pieces. The other thing is the pipeline had been a little fickle, not in terms of its quality but in terms of speeds of decision. As we crossed into '09, everyone decided -- you don't get any points for initiating a new project in the middle of challenging economic times. So there has been slowdown in converting pipeline to revenue, particularly in the consulting type of work, which is the stuff that converts within a month from pipeline to revenue. Those are the things that happened that, frankly, were a surprise to me.

…I think what has happened in March is people are getting their minds around how they are going to play the hand for '09. Because there have been personnel actions in most large companies. And so, people are recasting their '09 operating plans, their budget, and where they think the year is going to come out. They are re-examining the priorities of their initiatives in the work. Some of this demand and drive and activity around outsourcing has come out of -- what are the actions they are going to take to get their economic house in order for '09?”

Pamela Craig, Accenture CFO

“Net revenues for the second quarter were $5.27 billion, a decrease of 6% in US dollars and an increase of 3% in local currency over the same period last year. Q2 revenues were below our guided range of $5.45 billion to $5.65 billion, reflecting FX impact of negative 9%.

Consulting revenues were $3.03 billion, a decrease of 10% in US dollars and 1% in local currency. Outsourcing revenues were $2.24 billion, a decrease of 1% in US dollars, and an increase of 9% in local currency.

There has been a noticeable change in the demand environment as clients grapple with how a macroenvironment full of continuing economic challenges impacts their priorities.

For Q3-2009, expect revenues to be $5.1 billion to $5.3 billion, which assume a FX drag of approximately 12%. We expect operating margin this fiscal year to be in a range of 13.4% to 13.7%. Taking into account the updated revenue growth outlook, we now expect new bookings to be in the range of $23 billion to $25 billion. EPS to be in a range of $2.60 to $2.67. “


Steve Rohleder, Accenture COO

"Clearly, the global marketplace has shifted dramatically over the past few months. Beginning in January, we saw heightened marketplace uncertainty, which led to a systemic pause in certain segments of the market. This resulted in three factors affecting our consulting business. First, clients have started deferring decisions about new work, which has resulted in a slowdown in converting our pipeline to revenue in the quarter. Second, the small extensions and add-ons, that normally come through each quarter, did not come through at the rate we have seen historically. In fact, some clients are still operating without approved annual budgets. And third, in some cases, clients have asked us to work with them on reducing the run rate on existing consulting projects.

In this environment, companies are rethinking their priorities, looking at projects that will provide meet an immediate return on investment, deferring large, new, transformational IT projects, and turning to outsourcing to lower their cost structures. These shifting priorities are affecting each of our growth platforms in different ways.

In Management Consulting, clients are focused on sustained cost reduction and operational improvement. We are seeing an increase in CEO-sponsored efforts in areas such as customer retention, supply chain optimization, and M&A integration.

In Outsourcing, demand for application outsourcing remains strong as clients are seeking opportunities for near-term cost reductions. We are also seeing demand in BPO, particularly in finance and accounting and procurement . This demand coupled with the increased activity we are seeing in the pipeline, clearly supports our view that there is an acceleration in outsourcing opportunities. Our focus is on accelerating the conversion of the opportunities in our pipeline to bookings and revenue."