Accenture plc — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2021; fiscal year ends August 31. Unaudited results. Financial amounts below are in U.S. dollars.
Business context and performance
Accenture provides consulting and outsourcing services across three geographic markets: North America, Europe and Growth Markets. Management reported strong third-quarter momentum and rising demand for digital transformation, including cloud, security, modernization and managed services. COVID-19 continued to create uncertainty, but the increase in cases in India did not materially disrupt service delivery.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $13.264B | $10.991B | $37.114B | $33.492B |
| Operating income | $2.119B | $1.713B | $5.663B | $4.969B |
| Net income attributable to Accenture plc | $1.549B | $1.228B | $4.491B | $3.820B |
| Diluted EPS | $2.40 | $1.90 | $6.96 | $5.90 |
| Operating margin | 16.0% | 15.6% | 15.3% | 14.8% |
| Gross margin | 33.2% | 32.1% | 32.1% | 31.5% |
- Revenue increased 21% in U.S. dollars and 16% in local currency in Q3; for the nine months, growth was 11% and 8%, respectively. Favorable currency translation contributed about 5 percentage points to Q3 reported growth and 3 points to nine-month growth.
- Q3 local-currency revenue growth was 18% in North America, 14% in Europe and 15% in Growth Markets. Consulting and outsourcing each grew 16% in local currency.
- Nine-month operating cash flow was $6.539B, up from $5.059B. Investing cash outflow was $1.458B; financing cash outflow was $3.559B. Cash increased by $1.594B to $10.009B from August 31, 2020.
- At May 31, cash was $10.009B and total debt, including current and long-term debt, was about $71M. Accenture had $4.483B of borrowing facilities, no borrowings under them, and $674M of letters of credit outstanding. Management said funding needs should be met by operating cash flows and, if needed, borrowing facilities or future financing.
- Quarterly dividend was $0.88 per share; cash dividends paid in the nine months totaled $1.678B. Share purchases totaled $2.781B in the nine months.
- New bookings were $15.4B in Q3 and $44.3B for the nine months. Remaining performance obligations were approximately $22B; the company expected to recognize about 39% in fiscal 2021 and another 37% in fiscal 2022.
Changes, outlook and management commentary
- Compared with the prior-year quarter, Q3 revenue rose 21% in reported dollars, operating income rose 24%, and diluted EPS increased from $1.90 to $2.40. Nine-month diluted EPS rose to $6.96 from $5.90.
- Margin improvement reflected lower labor costs as a share of Q3 revenue. Nine-month gross margin also benefited from lower non-payroll costs, mainly travel, partly offset by higher labor costs and a one-time second-quarter bonus for employees below managing director level.
- Management noted competitive pricing pressure in many areas. Growth Markets operating income fell year over year in both the quarter and nine-month period, with higher labor costs and lower consulting contract profitability among the cited factors. Attrition was 17% in Q3 versus 11% a year earlier; utilization rose to 93% from 88%.
- Accenture estimated that, if exchange rates remained within recent ranges, fiscal 2021 U.S.-dollar revenue growth would be about 3.5 percentage points higher than local-currency growth. It expected a fiscal 2021 annual effective tax rate of 23%–24%. The filing does not provide a clear overall full-year revenue-growth or EPS guidance figure.
- Duck Creek Technologies investment gains were an unusual earnings contributor: $271M in gains and $41M related tax expense in the first nine months of FY2021. Management estimated these gains increased nine-month diluted EPS by $0.36; excluding them, EPS was $6.60 versus $5.75 in the prior-year period.
- Goodwill increased to $9.144B from $7.710B, largely reflecting acquisitions. Acquisitions completed in the nine months involved $1.484B of consideration, net of cash acquired.
Risks and contingencies
- Management identified continued COVID-19 effects, uncertain economic and political conditions, foreign-exchange volatility, competition and pricing, talent supply and retention, cybersecurity, and acquisition integration among relevant business risks. No material changes to the prior annual report’s risk factors were reported.
- Accenture faces a putative class action relating to the Starwood reservations database security incident. The company said it considers the lawsuit without merit and does not currently expect losses to materially affect results or financial condition. Management also said reasonably possible losses from other legal matters, net of insurance recoveries, would not have a material effect.
- Potential liabilities under expressly limited third-party performance guarantees were approximately $983M; most could be recovered from the third parties. Accenture reported no significant payments to date and assessed potential payments as immaterial to the financial statements as a whole.
Important facts for investors to verify
- How much future growth converts from bookings and remaining performance obligations, given that many client contracts are terminable on short notice and not all bookings qualify as performance obligations.
- Whether margin gains persist as labor costs, compensation, attrition and pricing competition evolve, particularly in Growth Markets.
- The extent to which reported growth and earnings depend on favorable currency translation and the Duck Creek investment gain.
- Cash allocation among acquisitions, dividends and share repurchases, including the stated intention to continue significant repurchases during the remainder of FY2021.
- Developments in the Marriott-related litigation and the continuing operational and financial effects of COVID-19.