Accenture plc — Q1 FY2019 Form 10-Q
Reporting period: Three months ended November 30, 2018; unaudited. Comparisons are with the three months ended November 30, 2017 unless otherwise noted. Amounts are in U.S. dollars.
Business context and performance
Accenture provides outsourcing and technology integration and other consulting services. Management reported strong demand across the business, particularly for digital, cloud and security services. Revenue grew across all operating groups in local currency, though growth was slight in Financial Services.
| Metric | Q1 FY2019 | Prior period | Change |
|---|---|---|---|
| Revenue | $10.606 billion | $9.884 billion | +7% U.S. dollars; +9.5% local currency |
| Operating income | $1.629 billion | $1.498 billion | +9% |
| Net income attributable to Accenture plc | $1.275 billion | $1.124 billion | +13% |
| Diluted earnings per share | $1.96 | $1.79 | +$0.17 |
| Cash dividends per share | $1.46 | $1.33 | — |
Margins, cash flow and financial position
- Margins: Gross margin was 31.1%, versus 31.0%; operating margin was 15.4%, versus 15.2%. Sales and marketing plus general and administrative costs were 15.7% of revenue, versus 15.8%.
- Cash flow: Operating activities provided $1.028 billion, compared with $1.006 billion. Investing activities used $273 million; financing activities used $1.462 billion. Cash decreased by $698 million during the quarter.
- Liquidity and debt: Cash and cash equivalents were $4.364 billion at November 30, compared with $5.061 billion at August 31, 2018. Current and non-current debt and bank borrowings totaled approximately $24.6 million. The company reported $2.042 billion of borrowing facilities with no borrowings outstanding; $333 million of letters of credit were outstanding.
- Capital returns: Accenture paid $933 million in dividends and spent $788 million on share purchases and redemptions during the quarter. Management intended to continue using a significant portion of operating cash for share repurchases in the remainder of FY2019.
Material changes and operating trends
- Growth was strongest in Resources (+21% local currency), Communications, Media & Technology (+14%), and Products (+10%); Financial Services grew 1%. By region, Growth Markets grew 17%, North America 10%, and Europe 6% in local currency.
- Consulting revenue increased 10% and outsourcing revenue 9% in local currency. New bookings were $10.2 billion: $5.9 billion consulting and $4.3 billion outsourcing.
- Management attributed operating income growth mainly to revenue growth and improved contract profitability in several groups. Health & Public Service operating income declined as expense growth outpaced revenue growth.
- Utilization was 92%, unchanged year over year. Headcount was approximately 469,000, up from 435,000; voluntary attrition was 15%, versus 13%.
- The U.S. dollar’s strength reduced reported revenue growth by about 2 percentage points versus local-currency growth in the quarter. Management estimated full-year FY2019 U.S.-dollar revenue growth would be about 3 percentage points below local-currency growth if exchange rates remained within recent ranges.
Outlook, accounting matters and risks
- Tax outlook: Management expected a FY2019 annual effective tax rate of 23%–25%. The quarter’s effective tax rate was 19.8%, compared with 20.5%.
- Remaining performance obligations: Approximately $18 billion at November 30; Accenture expected to recognize about 65% as revenue in FY2019 and a further 18% in FY2020. Management noted that many contracts can be terminated on short notice, so a significant portion of bookings is excluded from this measure.
- Accounting adoption: Topic 606 adoption increased quarter revenue by approximately $11.4 million and changed the classification of certain receivables and contract assets; the overall adoption impact was described as not material. Adoption of the intra-entity tax-transfer standard added $2.144 billion of deferred tax assets and retained earnings, with incremental tax expense expected as those assets are used; it had no cash-flow impact. The company expected this standard to raise its FY2019 annual effective tax rate by approximately 3.3 percentage points.
- Acquisitions and contingencies: Individually immaterial acquisitions cost $197 million, net of cash acquired. Potential liability under expressly limited third-party performance guarantees was approximately $765 million, largely recoverable from third parties; management considered potential payments immaterial. Management also believed reasonably possible losses from litigation and investigations, net of accruals and insurance, would not materially affect results or financial condition.
- Key risks: Economic and geopolitical uncertainty, currency movements, competition and pricing, changing technology and client demand, talent availability and retention, delivery execution, cybersecurity and data protection, tax-law changes, and acquisition integration. Management reported no material changes to the risk factors in its FY2018 Form 10-K and no material changes in market-risk exposure during the quarter.
Important facts for investors to verify
- Whether revenue growth, bookings and the $18 billion remaining-performance-obligation balance convert into sustained revenue and margins, given contract cancellation terms.
- The effect of currency movements and the intra-entity tax standard on FY2019 reported growth and the effective tax rate.
- Whether higher attrition and workforce growth affect utilization, compensation costs and service delivery.
- How continued buybacks and dividends compare with cash generation, acquisition spending and other funding needs.
- The implications of the $2.144 billion deferred-tax-asset increase and the expected FY2019 adoption of lease accounting, which management anticipated would materially increase balance-sheet assets and liabilities.