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Following one-year highs last week, IT consulting firm Accenture (ACN) shares are pressing pause today on lighter-than-expected Q2 (Feb) revenue guidance. Lower discretionary spending, which particularly impacts consulting work, and slower decision-making remained headwinds in Q1 (Nov). While ACN delivered top and bottom-line beats in the quarter despite these challenges, its immediate-term outlook was not as fortunate, projecting Q2 revs of $15.4-16.0 bln, an approximately 1% drop yr/yr at the midpoint, the first quarterly sales decline for ACN since the pandemic.

Nevertheless, ACN reiterated its FY24 (Aug) projections, underscoring how quickly the worst of its woes will resolve. The company continues to expect EPS of $11.97-12.23 and revenue growth of +2-5% in FY24. This positive development and ACN's upbeat headline numbers might have been sufficient in maintaining upward momentum if it were not for shares likely overextending themselves leading into the company's Q1 report. The stock climbed +17% from October lows, recently boasting six straight green days until yesterday's minor profit-taking snapped the streak. Still, today's move is modest in scope, highlighting a general enthusiasm surrounding ACN ahead of the new year.

• This enthusiasm likely boils down to AI. Management has repeated that 2023 was a year of generative AI experimentation, evidenced by deal sizes hovering around just $1.0 mln, a minor amount given ACN inks deals valued at over $100 mln. However, 2024 will center around ACN helping its clients scale their AI investments.
• AI demand also continues to accelerate; ACN enjoyed over $450 mln in Gen AI sales in Q1, outpacing the entirety of FY23. With under 10% of companies utilizing AI, according to ACN, the company is staring at massive potential over the long run.
• Meanwhile, even though ACN's Communications, Media & Technology (CMT) sector is disproportionately hurt by macroeconomic headwinds, realizing a 10% decline in sales yr/yr during Q1, the rest of its segments are expanding nicely. Health & Public Service was the star in the quarter, jumping by 13%. At the same time, Resources, Products, and Financial Services all exhibited growth at 7%, 4%,and 2%, respectively.
• ACN's diversification kept revs from turning negative in Q1, improving by 3% yr/yr to $16.22 bln. Furthermore, ACN remains on track with previously announced business optimizations to reduce structural costs. This assisted with a 20 bp bump in adjusted operating margins yr/yr in Q1, driving a 6% jump in adjusted EPS to $3.27.

The pace of spending remains negatively affected by macroeconomic conditions, especially across ACN's CMT segment and in the U.K., which endured greater-than-expected challenges in Q1. However, plenty of uplifting developments are ahead. ACN continues to see considerable demand for cloud migration, business modernization, and generative AI. ACN estimates that only 40% of enterprise workloads are in the cloud, of which just 20% are modernized, underscoring tremendous opportunities ahead. Given how light today's pullback is even after an impressive rally to one-year highs, the market is equally excited.