Accenture's Investment In Cloud-based Technology Pays Off, Say Analysts

Accenture’s second quarter results are an indicator of what looks to be a good year for the IT and consulting firm, say analysts. However, it may not be a good year for the broader technology services sector, especially for firms that do not have a clear road map on digital and cloud, the experts added.

Over the last year, Accenture has doubled down on digital services by aggressively investing in cloud-based technology, which has paid off. New bookings for the quarter ended February 28 were a record $16 billion, with both consulting and outsourcing accounting for $8 billion each.

“These were solid results (for Accenture) but only the first down payment on what is looking to be a great year. They have a stacked pipeline, the market is growing fast and we are moving into a critical skills shortage, which will allow them to keep margins high. I think they are successfully keeping expectations below what they are likely going to achieve,” said Peter Bendor-Samuel, CEO at research firm Everest Group.

Accenture on Thursday raised its full-year revenue forecast, and reported an eight per cent increase in Q2 revenue (in dollar terms).

Over the course of the pandemic, customers have looked to become cost effective, and drive operational efficiency. “Accenture is known to drive operational efficiency and cost. And this particular crisis may have given some more opportunities to convince their customers to look at total cost of ownership, drive more automation, more digitalisation and try and align themselves to the business outcome, more cloud transformations, etc, to migrate applications to cloud,” said DD Mishra, senior director analyst at Gartner.

There has been a shift in Accenture’s way of dealing as well. Over the past one-and-a-half years, Accenture has moved from being more transformational, and is now open to looking at legacy business. That will give it exposure to bigger markets, added Mishra.

Analysts, however, say only those who have been early players in cloud will see good momentum and, hence, Accenture’s result should not be seen as a theme for others.

“While Accenture’s recent strength in outsourcing has often been perceived as the lead indicator for Indian IT by consensus, it needs to be seen whether it is coming at the expense of market share consolidation,” said analysts Sudheer Guntupalli and Hardik Sangani of ICICI Securities in a post earnings note on Friday.

The brokerage maintained its underweight stance on the IT sector, because of a reversion of traffic from digital to physical channels as the Covid-19 scare fizzles out, limited long-term visibility around a technology change, and cannibalisation or deflation of the existing revenue lines.

Indian IT service providers have managed to seize the opportunity presented by the pandemic, but they have faced challenges going through renegotiations with customers, according to Mishra. Not all have benefited equally. “The top line has eroded, and the amount of growth which they expected is not there. Definitely, they have grown and they’re in the process of recovery, and some have managed and been smarter,” he said. However, he expects businesses to move towards recovery.

Bendor-Samuel expects the market to show strong results driven by the themes of practical digital at scale, modernisation, and return of discretionary spending.

“Outsourcing the legacy tail, as the two drivers (of digital and scale and modernisation) take hold, firms are left with some legacy that does not make sense to modernise. Rather than operating two models they are moving these tails to service providers,” he added.