Accenture plc — Form 10-Q Summary
Business context and reporting period
Accenture provides consulting and outsourcing services. This unaudited filing covers the third quarter and first nine months of fiscal 2019, ended May 31, 2019. Unless stated otherwise, financial amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 FY2019 | First nine months FY2019 | Prior comparable period |
|---|---|---|---|
| Revenue | $11.10 billion; +4% reported, +8% local currency | $32.16 billion; +5% reported, +9% local currency | Q3 $10.69 billion; nine months $30.49 billion |
| Operating income / margin | $1.72 billion / 15.5% | $4.73 billion / 14.7% | Q3 $1.63 billion / 15.3%; nine months $4.43 billion / 14.5% |
| Net income attributable to Accenture plc | $1.25 billion | $3.65 billion | Q3 $1.04 billion; nine months $3.03 billion |
| Diluted EPS | $1.93 | $5.62 | Q3 $1.60; nine months $4.76 |
| Gross margin | 31.8% | 30.7% | Q3 31.2%; nine months 30.4% |
Operating cash flow for the nine months was $4.51 billion, up from $3.92 billion. Investing activities used $1.38 billion, including $1.06 billion for acquisitions and investments and $358 million for property and equipment. Financing activities used $3.42 billion, including $2.28 billion for share purchases and $1.86 billion in dividends. Cash declined $292 million to $4.77 billion from August 31, 2018.
At May 31, 2019, total debt was approximately $24 million. Accenture reported $2.04 billion of borrowing facilities with no borrowings outstanding and $405 million of letters of credit. Management said current and longer-term funding needs should be met through operating cash flow and, if needed, borrowing facilities and financial markets.
Material changes versus prior periods
- Q3 revenue growth was strongest in Resources (+19% local currency), while Financial Services grew 4%. By region, Growth Markets rose 13%, North America 9%, and Europe 5% in local currency. Outsourcing grew 10% and consulting 7% in local currency.
- Higher gross margin reflected lower labor costs as a percentage of revenue; nine-month improvement also reflected lower non-payroll costs. Sales and marketing and general and administrative expenses together rose as a share of revenue in Q3 and across the nine-month period.
- Foreign exchange reduced U.S.-dollar revenue growth relative to local-currency growth by approximately five percentage points in Q3 and four points for the nine months. The company estimated full-year FY2019 reported revenue growth would be about three percentage points below local-currency growth if exchange rates stayed within recent ranges.
- Cash used for acquisitions and investments increased year over year; acquisitions completed in the nine months cost approximately $1.03 billion, net of cash acquired. Goodwill rose to $6.08 billion from $5.38 billion at August 31, 2018.
- Shareholders’ equity included a $2.14 billion increase in retained earnings from adopting the intra-entity transfer tax accounting standard, alongside a $6.5 million decrease from adopting the revenue standard. Adoption of the tax standard also increased deferred tax assets; the company expects incremental tax expense as those assets are used.
Outlook, management commentary, risks and unusual items
- Management described demand as strong across the business, citing digital-, cloud- and security-related consulting demand and client interest in cost efficiency, transformation and cloud enablement. Q3 utilization was 91%, unchanged year over year; headcount was approximately 482,000, versus 449,000 a year earlier, and voluntary attrition was 18%, up from 17%.
- New bookings were $10.6 billion in Q3 and $32.6 billion for the nine months. Remaining performance obligations were approximately $18 billion; the company expected to recognize about 39% in FY2019 and a further 37% in FY2020. Many contracts are terminable on short notice, so bookings are not equivalent to these obligations.
- Management expected the FY2019 annual effective tax rate to be 22.5%–23.5%. The filing does not provide a clear overall full-year revenue or EPS guidance figure.
- Risks highlighted include economic and geopolitical uncertainty, currency fluctuations, changing client demand and technology, competition and pricing pressure, talent availability and attrition, cybersecurity, tax changes, acquisition integration, and performance-linked contract fees that can increase revenue and margin variability.
- Legal matters and client indemnifications were reported in the ordinary course. Management stated that reasonably possible losses beyond accrued amounts, net of insurance, were not expected to materially affect results or financial condition; it also said potential payments under guarantee arrangements were expected to be immaterial.
- Accenture adopted Topic 606 for revenue recognition and Topic 740 guidance for intra-entity asset transfers in FY2019. Topic 606’s reported-period impact was not material overall. The company expects adoption of lease accounting in September 2019 to materially increase balance-sheet assets and liabilities, with no material impact expected on other financial statements or footnotes.
Important facts for investors to verify
- Whether local-currency demand and reported growth remain resilient if foreign-exchange headwinds persist.
- Whether margin gains continue, particularly in Financial Services and Health & Public Service, where operating income declined year over year in the nine-month period.
- How acquisition spending, integration and goodwill growth affect future returns and cash generation.
- Whether share repurchases and dividends remain sustainable alongside investment needs; management intended to use a significant portion of remaining FY2019 operating cash for repurchases.
- How the expected 22.5%–23.5% FY2019 tax rate and future utilization of deferred tax assets compare with realized tax expense.
- The conversion and timing of the $18 billion remaining performance obligations, recognizing that client termination rights limit what is included.