Accenture flags pressure on consulting business as clients turn cautious, Q1 revenue rises 5%

Accenture Plc on Friday outlined weakness in its consulting business and forecast lower-than-expected quarterly sales overall, signaling pressure as companies postpone business improvement projects amid economic uncertainty.

Accenture reported revenue of $15.7 billion for the first quarter of fiscal 2023, ended November 30, 2022, an increase of 5% in US dollars and 15% in local currency over the same period last year. This is higher than analysts' average estimate of $15.58 billion, and included a higher-than-anticipated 9.5% negative impact from a strong dollar.

Diluted earnings per share were $3.08, an 11% increase from $2.78 for the first quarter last year. Operating income was $2.59 billion, a 7% increase over the same period last year, and operating margin was 16.5%, an expansion of 20 basis points. Operating cash flow was $495 million and free cash flow was $397 million.

After a boom during the pandemic, spending on IT and transformation projects is normalising as companies see growth slowing. Firms are prioritising shorter-duration projects with stronger return-on-investments, Piper Sandler lead analyst Arvind Ramnani wrote in a recent note to investors.

Customers "are more and more focused on cost resilience and many of them are having to make really hard choices," said Chief Executive Officer Julie Sweet in a post-earnings conference call.

The strategy and consulting business will suffer a slight decline in sales in the second quarter, said Sweet, adding that the weakness is coming from industries such as retail and consumer goods.

For the current quarter, Accenture forecast revenue in the range $15.20 billion to $15.75 billion. The mid-point of the guidance is lower than analysts' estimate of $15.61 billion, according to Refinitiv.

A lower forecast by Accenture, considered the IT services and consulting bellwether, is a worry for the sector.

Last month, Cognizant Technology Solutions Corp slashed its revenue and adjusted earnings guidance for the full-year ending Dec. 31, citing higher costs and pullback in contracts.

For fiscal 2023, there will be softer demand for new consulting projects, said Julie Bhusal Sharma, equity analyst at Morningstar.

"We think generally, caution will persist – leading to delays in decision making, and that spending will be the softest in smaller deals over larger deals," Sharma added.

The warning overshadowed Accenture's higher-than-expected revenue and earnings in the first quarter.