Accenture plc — Q1 FY2020 Form 10-Q
Reporting period: Three months ended November 30, 2019; unaudited results compared with the three months ended November 30, 2018. Amounts below are U.S. dollars.
Business context and results
Accenture provides consulting and outsourcing services. Management reported continued strong demand across its businesses, particularly for digital-, cloud- and security-related work. Revenue increased 7% in reported dollars and 9% in local currency.
| Metric | Q1 FY2020 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $11.36 billion | $10.61 billion; up 7% reported, 9% local currency |
| Operating income and margin | $1.77 billion; 15.6% | $1.63 billion; 15.4% |
| Net income attributable to Accenture plc | $1.36 billion | $1.27 billion |
| Diluted EPS | $2.09 | $1.96 |
| Gross margin | 32.1% | 31.1% |
| Operating cash flow | $787 million | $1.03 billion |
| Cash and cash equivalents | $5.81 billion at November 30, 2019 | $6.13 billion at August 31, 2019 |
| Debt and lease liabilities | $19.6 million total current and long-term debt; $3.36 billion lease liabilities | Lease liabilities were newly recognized following lease accounting adoption |
| Dividends | $0.80 per share; $508 million cash paid | $1.46 per share and $933 million cash paid in the prior-year quarter; payment frequency changed from semiannual to quarterly |
Revenue mix and material changes
- All five operating groups grew in local currency: Health & Public Service 13%, Products 12%, Communications, Media & Technology 7%, Resources 7%, and Financial Services 6%.
- Consulting and outsourcing revenue each grew 9% in local currency. North America grew 9%, Europe 7%, and Growth Markets 13%.
- Operating income increased 8%. Gross margin improved primarily because labor costs were lower as a share of revenue. Sales and marketing and general and administrative costs rose as a share of revenue, reflecting higher business-development, technology and facilities costs.
- Diluted EPS rose $0.13. Higher revenue and operating results, non-operating income and lower weighted-average shares contributed; a higher effective tax rate partly offset these gains.
- Operating cash flow declined $241 million year over year, primarily due to changes in operating assets and liabilities, including the timing of certain compensation payments, partly offset by higher net income.
Liquidity, outlook and risks
- Cash decreased $316 million during the quarter. The company reported $2.02 billion of borrowing facilities with no borrowings outstanding, alongside $414 million of letters of credit.
- Management believes working-capital and general funding needs can be met through operating cash flow and, if necessary, borrowing facilities and future financing. It expects to use a significant portion of cash generated for share repurchases during the rest of FY2020; timing and amount may vary.
- Management expects FY2020 annual effective tax rate of 23.5%–25.5%. It estimated full-year reported-dollar revenue growth could be approximately one percentage point below local-currency growth if exchange rates remain within recent ranges. No specific full-year revenue-growth target is stated in the provided filing text.
- Remaining performance obligations were approximately $19 billion at November 30, 2019, down from $20 billion at August 31, 2019. The company expects to recognize about 61% in FY2020 and another 19% in FY2021. Many contracts are terminable on short notice, and bookings are not equivalent to reported performance obligations.
- Risks cited include uncertain economic and political conditions, competition and pricing, foreign exchange, changing technology and client demand, recruiting and retaining skilled personnel, cybersecurity, tax changes, and legal exposure. Utilization was 91%, versus 92% a year earlier; headcount was approximately 505,000 versus 469,000.
- Accenture was named in a putative consumer class action concerning the Starwood/Marriott data-security incident. The company disputes the claim; it said it cannot reasonably estimate a potential loss. Management stated that reasonably possible losses from legal matters, beyond accrued amounts and net of insurance, were not expected to materially affect results or financial condition.
Unusual items and accounting
Accenture adopted Topic 842 lease accounting on September 1, 2019, recognizing lease assets and liabilities; prior periods were not adjusted and the income-statement impact was not material. It also completed individually immaterial acquisitions for $97 million, net of cash acquired. The effective tax rate rose to 23.6% from 19.8%, mainly due to lower benefits from prior-year tax determinations and phased-in U.S. tax reform.
Investor verification priorities
- Assess whether revenue growth and margin improvement persist, including weaker Financial Services operating income and increased selling, technology and facilities costs.
- Review cash conversion and working-capital movements, particularly receivables, deferred revenues and compensation-payment timing.
- Evaluate lease commitments: $3.36 billion of recognized lease liabilities and $430 million of future lease payments for leases not yet commenced.
- Track tax-rate and foreign-exchange assumptions against actual full-year results.
- Monitor share repurchases and dividends relative to operating cash generation and acquisition spending.
- Follow the Marriott-related litigation and any developments that could affect the currently unestimable exposure.