Accenture Q3 Revenue Miss Due To Consulting Business Weakness & Deal Slippages: Wedbush Securities

[00:00:00]Will IT stocks be under pressure after Accenture cut its guidance is the question. I mean the overnight ADR sell-off does indicate that that will be true.

[00:00:11]But it's a you know the IT services space has already down. I mean you had a nice rebound which all has now faded.

[00:00:18]The IT index is down 24% already YTD year-to-date. Moshe Katri is with us at Wedbush Securities. Moshe, good morning.

[00:00:25]Good to have you with us here. How much should we extrapolate from what we heard from Accenture for Indian IT services?

[00:00:33]>> Here, as if we needed another reason to be negative on the sector, right? So, Accenture is a bellwether name in general and if you looked at the action in in the sector after their earnings, you've seen you know names down 5 to 15%. And even companies that are actually growing, you know, north of 10%. Heron, Verint Dynamics, EXL, everybody got hit. So, I think that, you know, it's um Accenture had some specific issues, you know, the consulting business got hit because of some because of the tensions in the Middle East. They had deal slippage probably because of the macro environment and because of the disruptive nature of AI. In general, the industry is going through some, you know, some some very very big changes that you'll see during the next few years, but uh bellwether names typically impact the entire universe and that's what we saw today.

[00:01:31]>> All right. Hi Moshe, good morning. Good to see you. You've been you know, one of the concerns from an India IT company's perspective was that Accenture's launched a new brand to focus on the mid-market enterprises to increase its time.

[00:01:44]Do you think that'll be a bit of a challenge for the mid-size Indian IT services companies?

[00:01:49]>> Not necessarily.

[00:01:51]Actually, you're actually raising a good good point about focus. And what I thought was interesting is that before the company released its earnings, they came up with another press release talking about multiple acquisitions that they've done in the cyber space, cyber security space.

[00:02:09]Um so, if I would have kind of looked at this in in in a way, I would come out and say, "Well, it seems that they're trying to pivot away from the traditional business just because the traditional business is going through some major challenges including cannibalization.

[00:02:24]Uh and now they're focusing on cyber security and they're paying a lot for those transactions. So, that's probably another negative for the sector. Uh and it kind of indicates that Accenture is trying to pivot away from what they focused on historically.

[00:02:37]>> All right. You know, since we have you with us, we also have have to ask you about uh the Indian IT services companies actually looking to pivot. We recently heard about uh you know, the investment uh that HCL Tech made in Serum AI. What do you make of that and how significant do you think would moves like this now be from here on?

[00:02:57]>> You know, ultimately, it's all about the new models that will emerge in this industry. Everybody's talking about outcome-based. Everybody's talking about hybrid software and services, more focus on products.

[00:03:09]Uh these are not changes that get reflected in the models in a day. Um this will take a couple of years to flush out. So, it's probably a good move. The question is what they do with it and how actually that gets translated into top-line growth or margin expansion.

[00:03:26]The good news from what we've seen so far is that margins are looking better than expected for the industry.

[00:03:32]The negative so far is that we're yet to see any sort of top-line growth acceleration or anything that's sustainable. That's the major issue here. Um and until we see better top-line growth for the industry, I think we're kind of stuck here.

[00:03:48]Uh and the P/E multiples in the States are down significantly. I mean, we're you know, this is a sector that 2 3 years ago was trading at 15 to 20 times EV to EBITDA, and now we're trading at 6 to 7 times.

[00:04:01]Um and these are for the companies that are growing somewhere in that low to mid single digits. This is the US. I'm not talking about the multiple premium that you are getting in India.

[00:04:12]>> You know, Mosha, the last time we chatted a few months ago, you were you had made this point that the Indian IT companies still traded at high teens mid to high teens uh in terms of a P/E multiple. You were getting a little bit more constructive when they come to low teens.

[00:04:26]Uh we've corrected a little bit from there.

[00:04:28]Would you selectively be looking at some of these Indian companies? I'll tell you why. Because now they're adapting to this entire AI uh you know, world. We're also seeing that they have fair bit of cash. There's a cash flow yield argument as well. And they've seen a big correction.

[00:04:44]Uh do you think most of the bad news is in the price and selectively you'll be looking at some of these Indian IT companies?

[00:04:52]>> You know, we thought that 7 8 times was the floor. Um as of today, we got a new floor.

[00:04:58]Um so, you know, it's difficult to really to call the bottom here.

[00:05:03]Um maybe the the event that we have to wait for is for the IPOs of Anthropic and OpenAI to be out just because maybe some of the bad bad press about the IT services space maybe bad maybe by then it'll kind of go away, but the multiples are also driven by sentiment, and that has not changed.

[00:05:22]Until that improves, it's almost impossible to kind of go out and and say we have to buy anything here.

[00:05:30]Uh unless these companies have very unique technologies and they're doing anything specific or special that's related to AI.

[00:05:40]Um it's interesting cuz in the space, you have two publicly traded companies that are focusing on that. One is Fractal trading in India, and the other one is Innodata that's trading in the US. Um Innodata's growing about 40% in the services business. That's the only one that's actually able able to get there.

[00:05:59]Uh you have some privates that are doing well.

[00:06:01]Uh Tridents, Touring, Tiger Analytics, but these are privately held companies.

[00:06:06]These are the companies that you probably want to focus on at least for now.

[00:06:09]>> Yeah.

[00:06:09]>> Um the others I would say it's work in progress.

[00:06:12]>> Rob, [clears throat and snorts] you have coverage on Fractal? Uh sorry, uh uh Uh Mosha, you have coverage on Fractal?

[00:06:19]>> Uh we don't cover Fractal uh at Wedbush, but we know we know the company pretty well.

[00:06:24]>> Okay. And you you think they're doing the right thing? Uh the right things and they've sort of, you know, set up nicely.

[00:06:29]>> They seem to be They seem to be well positioned uh especially given the growth rates. Obviously, they've had a few bumps, but the but positioning-wise, they seem to be in good shape.

[00:06:40]>> You know, just one thing uh Mosha, and so it's a maybe uh it needs a longer discussion, but here in India, it's almost as if many investors are saying, "Well, this entire AI thing is to cool off for people to pay attention to other other markets, other groups of stocks, etc." And and one of the things is this underlying tension within all these AI models, which is the cost of tokens.

[00:07:00]Uh so far, it's been subscription, but do you think they will everybody will move to pub token usage? And if that happens, uh will all these revenue assumptions start to compress because you know, with $20 a month now, I can use as much as I want. But if you if I had to pay by token uh or whatever, I mean, you know, some other model, I mean, I may not use as much. So, that directly kind of talks to the revenue assumptions for these companies, and uh and then we can sort of, you know, take it from there. Do you think we are we are at that point?

[00:07:29]>> So, I think the the ideal The ideal scenario is going to be, and this is under the possibility that the tokens get to be so expensive uh and using the Open AI or the Anthropic models get to be so expensive down the road that for you know for efficiency purposes companies will probably have some sort of a hybrid model. They'll be using those subscriptions, but they're also being using human software engineers to do the work just to be able to kind of you know maybe better better spend their money if you will. But that's probably the the best model down the road in term you know when we get there. Is it happening today? Definitely not.

[00:08:13]>> All right. We'll leave it there. Thank you very much Moshe. Appreciate you joining us and uh uh always a great to be speaking with you. Thank you very much.

[00:08:20]>> Thanks thank you.