Accenture plc — Form 10-Q Summary
Business context and period. This unaudited filing covers the first quarter of fiscal 2018, the three months ended November 30, 2017, and compares results with the quarter ended November 30, 2016. Accenture provides consulting and outsourcing services across five operating groups. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 / comparison |
|---|---|---|
| Net revenues, before reimbursements | $9.523 billion | $8.516 billion; up 12% in U.S. dollars and 10% in local currency |
| Total revenues, including reimbursements | $10.054 billion | $9.006 billion; up 12% |
| Operating income and margin | $1.486 billion; 15.6% | $1.332 billion; 15.6% |
| Net income attributable to Accenture plc | $1.124 billion | $1.004 billion |
| Diluted earnings per share | $1.79 | $1.58 |
| Gross margin | 32.1% | 32.1% |
| Cash from operating activities | $1.006 billion | $1.084 billion |
- Revenue growth was broad-based. Local-currency growth was 11% in Financial Services, 10% in Communications, Media & Technology, 8% in Health & Public Service, 10% in Products and 10% in Resources. Consulting grew 11% and outsourcing 9% in local currency.
- By region, local-currency net revenue increased 7% in North America, 11% in Europe and 16% in Growth Markets. The U.S. dollar’s weakening added about 2 percentage points to reported revenue growth.
- Sales and marketing plus general and administrative expenses were 16.4% of net revenues, flat year over year. Operating income rose 12%, while operating margin was unchanged.
- New bookings were $9.98 billion: $5.93 billion consulting and $4.05 billion outsourcing.
- Cash and cash equivalents were $3.682 billion at November 30, down from $4.127 billion at August 31, 2017. Cash declined $445 million during the quarter.
- Investing activities used $259 million, versus $690 million a year earlier, mainly reflecting lower acquisition and investment spending. Financing activities used $1.179 billion, including $854 million of dividends and $563 million of share purchases.
- Debt was low: $2.979 million current and $22.226 million long-term at November 30. The company reported $1.715 billion of borrowing facilities with no borrowings under them; $203 million of letters of credit were outstanding.
Material changes and management commentary
- Net revenues grew faster in U.S. dollars than local currency because of favorable foreign-exchange translation. Management estimated that, if exchange rates remained within recent ranges, full-year FY2018 U.S.-dollar revenue growth would be about 2.5 percentage points above local-currency growth.
- Operating cash flow fell $78 million year over year. Management attributed the decrease to a larger increase in net client balances and a decrease in accounts payable, partly offset by higher net income.
- Utilization was 92%, unchanged year over year. Headcount rose to approximately 435,000 from approximately 394,000 a year earlier; attrition excluding involuntary terminations was 13%, versus 12%.
- Management said demand remained strong across service lines and regions, with demand for digital-, cloud- and security-related work, alongside client cost-efficiency and transformation initiatives. Pricing was described as relatively stable. Gross margin was held flat by cost efficiencies offsetting lower consulting contract profitability and higher acquisition-related costs.
Outlook, risks and contingencies
- Management expected the FY2018 annual effective tax rate to be 22%–24%, excluding the impact of recently passed U.S. federal tax legislation. The legislation was still being evaluated; it could modestly affect the ongoing tax rate and could result in a non-cash FY2018 expense of up to $500 million from remeasurement of U.S. deferred tax assets.
- Adoption of income-tax guidance in FY2019 is expected to create deferred tax assets of up to $2.1 billion and incremental tax expense as those assets are used; the filing estimated an initial effect that could be about a 3.5 percentage-point increase in the annual effective tax rate. Management said adoption would not affect cash flows.
- Management expected to use a significant portion of operating cash flow for share repurchases during the rest of FY2018. Repurchase amounts may vary with market conditions, cash needs, acquisitions and management discretion.
- Key stated risks include economic and political uncertainty, foreign-exchange fluctuations, technology and client-demand shifts, competition and pricing, recruitment and retention, cybersecurity, delivery and utilization, tax changes, government contracting, acquisitions and legal exposure. Management reported no material changes to the risk factors in its FY2017 Form 10-K.
- Client guarantees and indemnifications included approximately $700 million of potential liability under expressly limited third-party performance guarantees, most of which the company said could be recovered from third parties. Management considered potential payments immaterial and reported no significant payments to date. Management also believed reasonably possible losses from litigation and investigations, beyond accrued amounts and net of insurance, would not materially affect results or financial condition.
- Accounting outlook: the new revenue-recognition standard was scheduled for adoption September 1, 2018; management expected revenue recognition to remain largely unchanged and did not then anticipate a material financial-statement impact. The new lease standard was expected to materially affect the balance sheet, but not materially affect other financial statements or footnotes.
Important facts for investors to verify
- Whether strong bookings convert to revenue and whether local-currency growth and demand remain broad-based.
- Whether consulting contract profitability, acquisition costs and compensation pressures affect margins, given flat gross and operating margins.
- Whether working-capital movements continue to constrain operating cash flow despite higher earnings.
- The actual FY2018 tax rate and the realized effects of U.S. tax legislation and FY2019 tax-accounting adoption.
- The scale and pace of share repurchases and dividends relative to cash generation and acquisition spending.
- Whether disclosed guarantee, litigation and investigation exposures remain immaterial, and whether currency movements materially affect reported results.