Accenture plc — Q1 Fiscal 2014 Form 10-Q
Reporting period: Three months ended November 30, 2013; comparisons are with the three months ended November 30, 2012, unless otherwise noted. Accenture provides consulting and outsourcing services through five operating groups. Amounts below are in U.S. dollars.
Financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net revenues, before reimbursements | $7.359 billion | $7.220 billion | Up 2% in U.S. dollars; 3% in local currency |
| Total revenues | $7.800 billion | $7.668 billion | Up 2% |
| Operating income | $1.091 billion | $1.049 billion | Up 4% |
| Operating margin on net revenues | 14.8% | 14.5% | Up 0.3 percentage points |
| Gross margin | 33.3% | 32.8% | Up 0.5 percentage points |
| Net income attributable to Accenture plc | $751.8 million | $698.8 million | Up 8% |
| Diluted earnings per share | $1.15 | $1.06 | Up 8% |
| Operating cash flow | $181.2 million | $(108.8) million | Improved $290 million |
Gross-margin improvement reflected lower annual bonus compensation, more capacity allocated to selling and business development, and improved outsourcing contract profitability. These benefits were partly offset by lower consulting contract profitability, compensation increases, and investment costs. Sales and marketing expense rose 7% to $928 million; general and administrative costs were approximately flat at $448 million.
Consulting net revenues were $3.938 billion, down 1% in U.S. dollars and flat in local currency. Outsourcing net revenues were $3.421 billion, up 5% in U.S. dollars and 6% in local currency. In local currency, Products and Health & Public Service each grew 6%, Financial Services grew 3%, Resources grew 1%, and Communications, Media & Technology declined 2%.
Cash, debt and liquidity
- Cash and cash equivalents were $4.527 billion at November 30, down from $5.632 billion at August 31, 2013. Current assets were $11.291 billion and current liabilities were $7.829 billion.
- Long-term debt was $25.9 million; no current debt or bank borrowings were reported. The company had $1.705 billion of borrowing facilities, with no facility borrowings and $187 million of letters of credit outstanding.
- Operating activities provided $181 million; investing activities used $196 million, including $137 million for acquisitions and investments; financing activities used $1.139 billion, including $630 million of cash dividends and substantial share purchases. Cash declined by $1.105 billion during the quarter.
- Management said cash balances and expected operating cash flows should cover working-capital and investment needs for the next 12 months. The company intended to continue using a significant portion of operating cash for share repurchases.
Outlook, commentary and notable items
- Management cited economic and geopolitical uncertainty, client spending restraint, competitive pricing pressure, and continued demand for cost savings and outsourcing. Demand for digital services and cloud computing was growing. Utilization was approximately 87%, within the company’s target range; headcount exceeded 281,000.
- Management estimated foreign exchange would reduce full-year FY2014 U.S.-dollar revenue growth by approximately 0.5 percentage points versus local-currency growth, assuming exchange rates remained within recent ranges. The expected FY2014 annual effective tax rate was 26.5%–27.5%; Q1’s rate was 25.1%, versus 26.8% a year earlier.
- Bookings were $8.68 billion: $4.28 billion consulting and $4.40 billion outsourcing. The filing cautions that bookings can vary significantly and are not equivalent to backlog; many contracts are terminable on short notice.
- Q1 included an $18 million reorganization benefit from releasing the remaining liabilities related to the company’s 2001 corporate-structure transition. Management attributed $0.03 of the diluted-EPS increase to reorganization benefits.
- On December 5, 2013, after quarter-end, Accenture acquired procurement-services provider Procurian for $375 million; purchase accounting was incomplete when the filing was issued. Q1 also included several individually immaterial acquisitions for $137 million, net of cash acquired.
- Accenture reported ordinary-course litigation and investigations, but management did not expect them to have a material effect. Potential liability under expressly limited third-party performance guarantees was approximately $709 million, of which all but approximately $16 million was potentially recoverable from the third parties; management believed potential payments would be immaterial overall. For guarantees with unspecified limits, maximum exposure could not be reasonably estimated.
Key facts for investors to verify
- Whether outsourcing growth and flat local-currency consulting revenue persist, particularly given the weakness in Communications, Media & Technology and near-term Resources trends.
- Whether margin gains are sustainable as compensation, offering investment, and sales-and-marketing costs change.
- Actual FY2014 revenue growth and tax rate versus management’s foreign-exchange and tax assumptions.
- Cash generation after dividends, repurchases, acquisitions, and working-capital movements; share purchases used $722 million during the quarter.
- Procurian’s subsequent contribution and integration, and the realization of expected benefits from acquisitions.
- Developments in client demand, pricing, staffing and utilization, foreign-exchange exposure, and legal or contractual contingencies.