Accenture plc — Q2 FY2020 Form 10-Q
Business context and period: Unaudited results for the three and six months ended February 29, 2020; comparisons are with the corresponding periods of fiscal 2019. Accenture provides consulting and outsourcing services. The filing was signed March 19, 2020, as the COVID-19 pandemic was creating significant uncertainty.
Financial performance
| Metric | Q2 FY2020 | Change year over year |
|---|---|---|
| Revenue | $11.14 billion | +7% in U.S. dollars; +8% in local currency |
| Operating income | $1.49 billion | +7% |
| Operating margin | 13.4% | Up from 13.3% |
| Net income attributable to Accenture plc | $1.23 billion | Up from $1.12 billion |
| Diluted EPS | $1.91 | Up from $1.73 |
| Gross margin | 30.2% | Up from 29.2% |
- Six-month results: Revenue was $22.50 billion, up 7% in U.S. dollars and 8% in local currency. Operating income was $3.26 billion, up 8%; operating margin was 14.5%, versus 14.3%. Net income attributable to Accenture plc was $2.59 billion, and diluted EPS was $4.00, versus $3.69.
- Cash flow: First-half operating cash flow was $2.32 billion, compared with $2.39 billion. Investing used $763 million and financing used $2.24 billion. Cash decreased $690 million to $5.44 billion.
- Liquidity and obligations: Current assets were $15.41 billion and current liabilities $11.18 billion. Cash and short-term investments totaled about $5.44 billion. Long-term debt and current debt/bank borrowings totaled about $20 million; lease liabilities were $3.39 billion. Accenture reported $2.05 billion of borrowing facilities with no borrowings, alongside $430 million of letters of credit outstanding.
- Capital returns: First-half cash dividends paid were $1.02 billion; share purchases were about $1.69 billion. The board declared a further $0.80-per-share dividend payable May 15, 2020.
Changes and operating trends
- Q2 local-currency revenue growth was strongest in Health & Public Service (+15%) and Products (+10%); Financial Services grew 3%. North America and Growth Markets each grew 11%, while Europe grew 2%.
- Consulting revenue rose 8% and outsourcing revenue rose 8% in local currency in Q2. Management cited demand for digital, cloud and security services, technology adoption, and client cost-efficiency and transformation work.
- Gross margin improved as labor and non-payroll costs declined as a share of revenue. However, sales and marketing and general and administrative expenses rose as a share of revenue, reflecting higher business-development, technology and facilities costs.
- Financial Services operating income fell to $230 million from $269 million in Q2; management cited lower outsourcing contract profitability and higher sales and marketing costs. Other operating groups reported higher income, led by Health & Public Service, Products and Resources.
- Q2 bookings were $14.2 billion ($7.2 billion consulting and $7.0 billion outsourcing); first-half bookings were $24.5 billion. Remaining performance obligations were approximately $19 billion, versus $20 billion at August 31, 2019; Accenture expected to recognize about 53% in fiscal 2020.
Outlook, risks and unusual items
- Accenture estimated full-year fiscal 2020 revenue growth in U.S. dollars would be about 1.5 percentage points below local-currency growth if exchange rates remained within recent ranges. The filing does not provide a specific full-year revenue-growth target.
- Management expected a fiscal 2020 annual effective tax rate of 23.5%–25.5%. The first-half rate was 20.6%, compared with 18.6%, mainly reflecting lower benefits from prior-year tax adjustments and phased-in U.S. tax reform, partly offset by share-based payment tax benefits.
- COVID-19 was identified as a material risk to demand, service delivery, client payment and financial results. The filing specifically cited possible client delays or terminations, travel restrictions and potential disruption to critical delivery operations in India and the Philippines. The ultimate effect was not yet predictable.
- Foreign currency translation reduced reported revenue growth relative to local-currency growth. Accenture also cited economic and geopolitical uncertainty, competition, talent and utilization management, cybersecurity, pricing and contract profitability as risks.
- Accenture completed individually immaterial acquisitions for $569 million, net of cash acquired, during the first half. Lease accounting adoption added recognized lease assets and liabilities; management said it had no material income-statement impact.
- Accenture disclosed a putative class action concerning the Marriott/Starwood reservation-database security incident. It said it believed the suit was without merit, would defend it, and could not estimate any possible loss. Management did not expect the broader reasonably possible legal losses, net of insurance, to materially affect results or financial condition.
- Effective March 1, 2020, Accenture began managing under three geographic markets; these were to become reportable segments in Q3 FY2020. Management said current and longer-term funding needs were expected to be met by operating cash flow and, if needed, borrowing facilities and capital markets.
Key investor checks
- Track the pandemic’s effects on client demand, contract cancellations, delivery capacity and collections; the quarter ended before the filing described the full effects.
- Compare reported revenue growth with local-currency growth and monitor currency movements and the stated full-year tax-rate range.
- Assess whether booking levels and the $19 billion of remaining performance obligations convert to revenue as expected, noting that many contracts are terminable on short notice.
- Monitor margin trends, particularly Financial Services profitability and rising selling, technology and facilities costs.
- Review cash generation alongside dividends, buybacks, acquisitions and lease commitments; verify the status and potential exposure of the Marriott-related litigation.