Accenture plc — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2019. Figures below are in U.S. dollars; financial statement amounts are rounded to billions unless otherwise noted. Comparisons are year over year.
Business context
Accenture provides consulting and outsourcing services across five operating groups. Management reported continued strong demand, particularly for digital, cloud and security services, and client initiatives focused on efficiency and business transformation. The interim statements are unaudited.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $10.45B | $9.91B | $21.06B | $19.79B |
| Operating income | $1.39B | $1.30B | $3.02B | $2.79B |
| Operating margin | 13.3% | 13.1% | 14.3% | 14.1% |
| Net income attributable to Accenture plc | $1.12B | $0.86B | $2.40B | $1.99B |
| Diluted EPS | $1.73 | $1.37 | $3.69 | $3.16 |
| Gross margin | 29.2% | 28.9% | 30.2% | 29.9% |
Revenue grew 5% in U.S. dollars and 9% in local currency in Q2; for the six-month period growth was 6% and 9%, respectively. Currency translation reduced reported growth. Q2 operating income rose 7%; six-month operating income rose 8%. Management attributed improved gross margin mainly to lower labor costs in Q2 and lower non-payroll costs for the six-month period.
For the first six months, operating cash flow was $2.39B, versus $1.93B a year earlier. Investing activities used $0.72B, mainly reflecting business acquisitions and investments; financing activities used $2.29B, including share repurchases and dividends. Cash declined by $0.60B to $4.46B from August 31, 2018. Total reported debt was approximately $24M, with $2.05B of borrowing facilities unused; $386M of letters of credit were outstanding. Management said expected cash flows and, if needed, borrowing facilities and financial-market activity should meet funding needs.
At February 28, 2019, total assets were $27.39B and shareholders’ equity was $13.73B. Current assets were $13.83B and current liabilities $10.22B. The balance sheet included $8.15B of current receivables and contract assets and $3.34B of current deferred revenues.
Changes, outlook and notable items
- Growth mix: Q2 local-currency revenue growth was strongest in Resources (22%), Communications, Media & Technology (12%), and Products (10%); Financial Services grew 2%. Growth Markets rose 16%, Europe 7%, and North America 8%. Consulting and outsourcing each grew 9% in local currency.
- Bookings: Q2 new bookings were $11.8B ($6.7B consulting; $5.1B outsourcing). Six-month bookings were $22.0B. Remaining performance obligations were approximately $19B; the company expected to recognize 57% in FY2019 and a further 24% in FY2020.
- Tax outlook: Management expected FY2019’s annual effective tax rate to be 22.5%–23.5%. The six-month effective rate was 18.6%. Comparisons with FY2018 are affected by a $137M tax charge related to the U.S. Tax Cuts and Jobs Act in Q2 FY2018.
- Currency: Assuming exchange rates remained within recent ranges, management estimated FY2019 U.S.-dollar revenue growth would be about 3 percentage points below local-currency growth. The filing provides no specific numerical revenue-growth target in local currency.
- Capital returns: The company paid $933M in dividends during the six months and repurchased $1.78B of shares. It intended to continue using a significant portion of operating cash flow for repurchases during the rest of FY2019, subject to market and other factors. A $1.46-per-share dividend was declared after quarter-end, payable May 15, 2019.
- Leadership and unusual expenses: Pierre Nanterme stepped down as chairman, CEO and director for health reasons on January 10, 2019, and died January 31. David Rowland became interim CEO; KC McClure became CFO. Q2 general and administrative expense included higher share-based compensation associated with the former CEO’s restricted share units vesting and settling upon his resignation.
- Accounting changes: Adoption of the intra-entity tax-transfer standard added $2.14B of deferred tax assets and retained earnings at September 1, 2018; management expected incremental tax expense as those assets are used. The company expected the new lease standard, effective September 1, 2019, to materially increase balance-sheet assets and liabilities, but not materially affect other financial statements.
Risks and contingencies
Management highlighted economic and geopolitical uncertainty, foreign-exchange movements, competition and pricing, client demand, hiring and retention, workforce utilization, delivery costs, cyber and data security, taxes, acquisitions and integration, and performance-linked contract fees. The filing reported no material change to the risk factors in the prior annual report. Management stated that pending litigation and investigations, net of accrued amounts and insurance recoveries, were not expected to materially affect results or financial condition. Potential client guarantees were disclosed, but management considered potential payments immaterial; no significant payments had been made to date.
Most important facts for investors to verify
- Whether revenue growth, bookings and the $19B remaining performance obligations convert into sustained revenue and margins, especially in slower-growing Financial Services.
- How foreign exchange affects reported growth and whether the FY2019 tax-rate outlook is achieved, including the effect of deferred tax asset utilization.
- Whether cash generation supports planned buybacks and dividends alongside acquisitions, and how capital returns affect share count and liquidity.
- The scale and timing of balance-sheet changes from lease accounting, and the financial impact of acquisitions and related goodwill growth.
- Whether leadership transition, employee attrition and higher compensation or share-based costs affect execution and profitability.