Accenture plc — Q1 FY2015 Form 10-Q
Reporting period: Three months ended November 30, 2014; comparisons are with the three months ended November 30, 2013 unless otherwise noted. Accenture provides consulting and outsourcing services globally. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q1 FY2015 | Prior-year comparison |
|---|---|---|
| Net revenues, before reimbursements | $7.896 billion | +7% in U.S. dollars; +10% in local currency |
| Total revenues, including reimbursements | $8.343 billion | $7.800 billion |
| Operating income / margin | $1.188 billion / 15.0% | $1.091 billion / 14.8% |
| Net income attributable to Accenture plc | $831.5 million | $751.8 million |
| Diluted EPS | $1.29 | $1.15 |
| Operating cash flow | $872.9 million | $181.2 million |
| Cash and cash equivalents | $4.472 billion at November 30, 2014 | $4.921 billion at August 31, 2014 |
Gross margin declined to 32.2% from 33.3%, mainly from higher labor costs and greater subcontractor use. Sales and marketing and general and administrative costs together fell to 17.1% of net revenues from 18.7%. The effective tax rate was 25.1% in both quarters. Cash dividends were $1.02 per share, versus $0.93.
Current assets were $11.576 billion and current liabilities $8.137 billion. Long-term debt was $26.8 million; current debt and bank borrowings were negligible. Accenture reported $1.711 billion of borrowing facilities with no borrowings and $164 million of letters of credit outstanding. Financing cash outflow was $1.127 billion, including $678.7 million of dividends and $670.2 million of share purchases; investing cash outflow was $89.2 million. Cash declined by $449.0 million during the quarter, including a $105.8 million adverse currency effect.
Material changes and operating trends
- Net revenue growth was broad-based: all operating groups grew in local currency. Communications, Media & Technology grew 15%, Health & Public Service 13%, Financial Services 11%, Products 10%, and Resources 2%.
- Outsourcing net revenues grew 14% in local currency, compared with 7% growth in consulting. North America grew 12%, Europe 9%, and Growth Markets 9% in local currency.
- Operating income increased 9%, while diluted EPS rose 12%. Resources operating income declined to $210 million from $247 million, reflecting weaker consulting revenue and lower consulting contract profitability.
- Operating cash flow improved substantially year over year, but management attributed part of the increase to compensation payments shifting from Q1 to Q2 and higher collections on net client balances.
- Foreign-currency translation reduced U.S.-dollar revenue growth by approximately 3 percentage points versus local-currency growth. Foreign currency translation losses also contributed to a decline in comprehensive income attributable to Accenture plc to $662.8 million from $918.9 million.
Outlook, commentary and risks
Management expected fiscal 2015 U.S.-dollar revenue growth to be approximately 5 percentage points below local-currency growth if exchange rates remained within recent ranges. It expected a fiscal 2015 annual effective tax rate of 26%–27%. The filing does not provide a specific full-year revenue-growth target. Management said it expected Resources consulting trends to weigh on year-over-year growth in that business in the near term.
First-quarter bookings were $7.66 billion: $3.86 billion consulting and $3.80 billion outsourcing. Utilization was 91%; headcount was approximately 319,000, up from approximately 281,000 a year earlier. Management cited continued demand, competitive conditions and relatively stable pricing, while noting labor-cost pressure and the need to balance staffing with demand. It planned to continue using a significant portion of operating cash for share repurchases during the rest of fiscal 2015. Management believed cash and expected operating cash flows would be sufficient for working capital and investment needs over the next 12 months.
Key disclosed risks include economic uncertainty and client demand, competition and pricing, hiring and retention, labor costs and utilization, foreign-exchange movements, contract delivery and third-party performance, cybersecurity and data protection, and tax matters. Accenture reported ordinary-course litigation and investigations; management did not expect them to materially affect results or financial condition. Potential client guarantees with expressly limited terms totaled approximately $773 million, but all except about $8 million was expected to be recoverable from third parties; management considered potential payments immaterial. The company reported no material changes to its previously disclosed risk factors.
Other notable items: the prior-year quarter included an $18.0 million reorganization benefit, while the current quarter had none. Accenture recorded a $105.5 million net loss on non-designated foreign-currency forwards, with gains and losses intended to be offset by related hedged items. The company was assessing the impact and adoption method for the new revenue-recognition standard, effective for it beginning September 1, 2017.
Most important facts for investors to verify
- Whether local-currency growth converts into U.S.-dollar growth as assumed, given currency exposure and management’s stated translation outlook.
- Whether gross-margin pressure from labor costs and subcontractors eases, and whether the strong reported operating cash flow is sustained after the timing-related compensation shift.
- Whether Resources consulting weakness persists and how bookings translate into future revenue and margins.
- Whether planned buybacks and dividends remain consistent with cash generation, liquidity and investment needs.
- The eventual effects of the new revenue-recognition standard, tax matters, and the status of legal and client-guarantee exposures.