Accenture Plc quarterly report, Q2 FY2010

Accenture plc — Q2 FY2010 Form 10-Q

Business context and period: Unaudited results for the quarter and six months ended February 28, 2010; comparisons are with the corresponding 2009 periods. Accenture provides consulting, systems integration and outsourcing services. The filing notes that interim results are not necessarily indicative of full-year results.

Financial performance and liquidity

Metric	Three months	Six months
Net revenues	$5.176 billion; down 2% in U.S. dollars and 8% in local currency	$10.559 billion; down 6% in U.S. dollars and 10% in local currency
Operating income / margin	$651 million / 12.6%, versus $677 million / 12.9%	$1.397 billion / 13.2%, versus $1.492 billion / 13.2%
Net income attributable to Accenture plc	$400 million, versus $411 million	$845 million, versus $891 million
Diluted EPS	$0.60, versus $0.63	$1.27, versus $1.37
Gross margin	32.7%, versus 30.8%	32.9%, versus 31.1%

For the six months, operating cash flow was $879 million, down from $1.099 billion. Investing activities used $77 million and financing activities used $1.175 billion. Cash decreased $427 million to $4.115 billion at February 28, 2010, from $4.542 billion at August 31, 2009. Management attributed the lower operating cash flow mainly to increased net client balances, lower net income and other working-capital movements.

Cash and cash equivalents were $4.115 billion; total debt was approximately $0.4 million. Accenture reported $1.716 billion of borrowing facilities with no borrowings and $157 million of letters of credit outstanding. It said cash and expected operating cash flow should cover working-capital and investment needs for the next 12 months.

Material changes and operating trends

Consulting net revenues fell 3% in U.S. dollars and 9% in local currency in Q2; outsourcing was flat in U.S. dollars and down 6% in local currency. For the half year, consulting fell 9% in U.S. dollars and 13% in local currency; outsourcing fell 2% and 5%, respectively.
Management said the consulting decline moderated in Q2 in several operating groups and reported improved demand in some areas. Q2 bookings were $6.52 billion ($3.39 billion consulting; $3.13 billion outsourcing); six-month bookings were $12.05 billion. Bookings are estimates, can vary significantly, and are not equivalent to backlog because many contracts are terminable on short notice.
Q2 gross margin improved, while operating margin declined slightly. Accenture attributed higher gross margin partly to a sales-effectiveness initiative that shifted more client-services payroll costs to sales and marketing. Sales and marketing expense rose 20% in Q2; general and administrative expense fell 6%.
Financial Services operating income rose to $185 million in Q2 from $96 million; Health & Public Service fell to $37 million from $136 million, partly reflecting inefficient delivery on a consulting contract and a favorable prior-year contract-termination resolution. Segment comparisons also reflect the formation of Health & Public Service in fiscal 2010.
Consulting utilization was approximately 88% in Q2, above the prior-year 83%; headcount was approximately 181,000 versus 177,000 at fiscal year-end. Annualized attrition excluding involuntary terminations was 15%, up from 9% a year earlier.

Outlook, risks and unusual items

Management expected growth to return in some business areas based on current demand and Q2 bookings, while emphasizing that recovery would vary by segment and between consulting and outsourcing. It estimated foreign exchange could make full-year FY2010 revenue growth approximately 3 percentage points higher in U.S. dollars than in local currency if exchange rates remained within recent ranges.
Management forecast a FY2010 annual effective tax rate of 30%–32%, compared with 27.6% in FY2009. The six-month effective rate was 29.2%, versus 27.3%.
Economic uncertainty, cautious client spending, contract terminations and restructurings, pricing pressure, longer public-sector sales cycles, utilization and staffing balance, client collections, and foreign exchange were identified as business risks. The filing reported no material change in market-risk exposure during the half year.
Reorganization liabilities were $288 million at February 28, 2010. Accenture said final payments could exceed recorded amounts; one jurisdiction remained significant, with disputes and expected litigation involving tax authorities. Management said it intended to defend its positions.
A U.S. Department of Justice-intervened False Claims Act/Anti-Kickback Act case concerning alleged vendor-alliance disclosures could seek significant remedies and could lead to related proceedings. Accenture said it would defend the matter and did not expect a material financial effect. Management likewise did not expect ordinary-course litigation and investigations to have a material effect.
Client indemnities and third-party performance guarantees included approximately $500 million of potential liability under expressly limited guarantees, with all but approximately $21 million potentially recoverable from third parties. The company said no significant payments had been required and expected potential payments to be immaterial overall.
Accenture paid a $0.75-per-share dividend in November 2009 and declared a further $0.375-per-share dividend payable in May 2010. It repurchased or redeemed approximately $790 million of shares during the first half and had about $4.1 billion of authorization remaining at February 28.

Key facts for investors to verify

Whether bookings and signs of improving consulting demand translate into sustained local-currency revenue growth.
Whether gross-margin gains persist as sales and marketing spending rises, and whether segment delivery issues are resolved.
Whether operating cash flow recovers as receivables and other client balances change.
Actual FY2010 tax rate and foreign-exchange contribution relative to management’s estimates.
Developments in the reorganization tax disputes and the DOJ case, including any change in potential exposure.