Accenture (ACN) Q4 2013 Earnings Call September 26, 2013 4:30 PM ET
Pierre Nanterme - Chairman and Chief Executive Officer
David P. Rowland - Chief Financial Officer
Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division
Tien-tsin Huang - JP Morgan Chase & Co, Research Division
David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division
Julio C. Quinteros - Goldman Sachs Group Inc., Research Division
Kathryn L. Huberty - Morgan Stanley, Research Division
Bryan Keane - Deutsche Bank AG, Research Division
Moshe Katri - Cowen and Company, LLC, Research Division
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division
David J. Koning - Robert W. Baird & Co. Incorporated, Research Division
Ashwin Shirvaikar - Citigroup Inc, Research Division
David Togut - Evercore Partners Inc., Research Division
Ladies and gentlemen, thank you for standing by, and welcome to Accenture's Fourth Quarter Fiscal 2013 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'd now like to turn the conference over to KC McClure, Managing Director of Investor Relations. Please go ahead.
Thank you, Paul, and thanks, everyone, for joining us today on our fourth quarter and full year fiscal 2013 earnings announcement. As Paul just mentioned, I'm KC McClure, Managing Director of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer.
We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for both the fourth quarter and the full year. Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the first quarter and full fiscal year 2014. And then we will take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements, or net revenues.
Some of the matters we'll discuss on this call are forward-looking, including the business outlook. You should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and that such statements are not a guarantee of our future performance.
Such risks and uncertainties include, but are not limited to, general economic conditions and those factors set forth in today's news release and discussed under the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of those measures, where appropriate, to GAAP in our news release or on the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call.
Now let me hand -- turn the call over to Pierre.
Thank you, KC, and thanks, everyone, for joining us today. We are pleased with our results for the fourth quarter and full fiscal year, which demonstrate our ability to continue to drive profitable growth in a volatile and fast-changing market environment.
For the full year, we once again increased market share, drove double-digit EPS growth and strong free cash flow and delivered value for our shareholders. David will provide more detail on both the quarter and the year in a moment, but here are a few highlights for the full year.
We delivered new bookings of $33.3 billion, an all-time high and near the top of our guided range. We generated revenues of $28.6 billion, a 4% increase in local currency. Fourth quarter revenues of $7.1 billion were above our guided range, and we were pleased with our double-digit growth in Health & Public Service and improved performance in both Resources and Communications, Media & Technology.
We delivered earnings per share of $4.93. After adjusting to exclude tax and reorganization benefits in the second and third quarters, earnings per share for the year were $4.21, a 10% increase.
We grew operating income and delivered operating margin of 15.2% for the year. After adjusting to exclude the reorganization benefits, we delivered operating margin of 14.2%, a 30 basis point expansion for the year, which was in line with our expectations.
We generated free cash flow of $2.9 billion, slightly above our guided range, and we continue to have a very strong balance sheet, ending the year with a cash balance of $5.6 billion. We continue to return cash to shareholders with $3.7 billion in share repurchases and dividend payments during the year. And we just announced a semiannual cash dividend of $0.93 per share, which is a 15% increase over our prior dividend.
In fiscal year '13, we, again, benefited from the diversity of our business, from an industry capability and geographic standpoint and made significant investments to position us well for the future.
Now let me hand over to David. David, over to you.
David P. Rowland
Thank you, Pierre, and thanks to all of you for joining us today. As I review the results on this afternoon's call, you'll see that we delivered good results in quarter 4, starting with continued strong profitability and cash flow, but also delivering solid improvement in our net revenues with local currency growth of 4.5%. We saw improvement in revenue growth in quarter 4 with 4 of our 5 operating groups, the Americas and EMEA posting stronger local currency growth in quarter 3.
Overall, we continued to increase market share in a challenging environment while driving our business to deliver on our profitability targets and returning a substantial portion of our strong cash flow to our shareholders.
Now let's get to the numbers, starting with new bookings. New bookings for the quarter were $8.4 billion, resulting in an all-time high of $33.3 billion in new bookings for the full year, which was also solidly in the upper half of our business outlook range provided in June. Consulting bookings were $3.8 billion and a book-to-bill of 1.0, consistent with what we signaled last quarter. Outsourcing bookings were very strong at $4.6 billion and a book-to-bill of 1.4.
Taking a closer look at our new bookings, there are several additional points worth noting. All 3 components of our consulting bookings, management consulting, technology consulting and systems integration, were all at the low end of our book-to-bill range and very similar to our Q3 bookings level. And at the same time, we did see consulting bookings convert to revenue slightly faster than we expected.
Outsourcing bookings showed continued strength and represented our fourth highest quarter on record. Technology outsourcing bookings reflect continued strong demand for solutions that drive operational efficiencies and enable greater business performance and yielded a book-to-bill of 1.2 for the quarter. BPO bookings were particularly strong, the second highest quarter ever, and reflected strong market demand for finance and accounting, procurement and industry-specific offerings and financial services.
Lastly, we had bookings over $100 million at 11 clients, giving us a record 44 clients with bookings at this level for the full year, which reflects our strong position in the marketplace and helping our clients tackle their largest, most complex projects.
Now turning to revenues. Net revenues for the quarter were $7.1 billion, an increase of 3.7% in U.S. dollars and 4.5% in local currency, reflecting a foreign exchange impact of approximately negative 1%, which was consistent with the assumption we provided in June. Quarter 4 revenues were roughly $90 million above the upper end of our guided range, primarily driven by stronger-than-expected consulting revenues.
Consulting revenues for the quarter were $3.8 billion, up 2% in U.S. dollars and 3% in local currency. Outsourcing revenues were $3.3 billion, an increase of 6% in U.S. dollars and 7% in local currency.
So looking at our -- how our operating groups contributed to our revenue results for the fourth quarter. H&PS continued to lead the way with double-digit local currency growth of 13%, driven by a very significant growth in North America. We saw balanced growth across Health & Public Service in both consulting and outsourcing. After 9 quarters of double-digit growth, we expect H&PS growth to moderate in the near term.
Products delivered 6% local currency growth in the quarter, slightly higher than their year-to-date performance, reflecting broad-based growth across most industries, across consulting and outsourcing and in both the Americas and EMEA. Financial Services grew 3% in local currency for the quarter and as expected, lower than the growth rate in each of the first 3 quarters. Growth continues to be driven by strong outsourcing activity, reflecting our clients' focus on large transformational projects.
Consulting revenues declined modestly, including lower levels of growth in insurance in the Americas as several projects are ramping down. Growth this quarter was also impacted by a tough year-over-year compare. We expect the growth rate in Financial Services to be similar in quarter 1.
CMT delivered 2% local currency growth in quarter 4, reflecting the improvement we expected. And we're particularly pleased with the performance in the Americas, especially in electronics and high tech. Resources also showed improvement with flat local currency revenue growth in the quarter, reflecting some overall stability in the business. We continue to work hard to reposition the business, especially in North America.
So moving down the income statement, gross margin for the quarter was 33.2% compared to 32.9% for the same period last year, up approximately 30 basis points. Sales and marketing expense for the quarter was 12.6% of net revenues compared with 12.3% of net revenues for the fourth quarter last year.
General and administrative expense was 6.7% of net revenues compared with 6.9% of net revenues for the fourth quarter last year. Operating income was $984 million in the fourth quarter, reflecting a 13.9% operating margin, up 10 basis points compared with quarter 4 last year.
Our effective tax rate for the quarter was 24.6% compared with 32.8% for the fourth quarter last year. This lower rate in the quarter was primarily due to a lower level of reserve additions and higher benefits related to final determinations of prior-year tax liabilities.
Net income was $727 million for the fourth quarter, and it was $636 million for the same quarter last year, an increase of 14%. Diluted earnings per share were $1.01 compared with $0.88 in the fourth quarter last year, an increase of $0.13.
Turning to DSOs. Our days services outstanding continue to be industry leading. They were 31 days, up from last quarter and the 27 days in quarter 4 last fiscal year. Free cash flow for the quarter was $1.2 billion, resulting from cash generated by operating activities of $1.3 billion, net of property and equipment additions of $102 million.
Moving to our level of cash. Our cash balance at 8/31 was $5.6 billion compared with $6.6 billion at 8/31 last year, which reflects the significant level of cash returned to shareholders, a number of strategic acquisitions this year and our decision to fund the U.S. pension plan in quarter 1.
Moving to some other key operational metrics. We hired approximately 60,000 people in FY '13, ending the year with a global headcount of about 275,000 people, and we now have over 182,000 people in our Global Delivery Network. In quarter 4, our utilization was 88%, consistent with quarter 3. Attrition, which excludes involuntary terminations, was 12%, in line with quarter 3 of this year and quarter 4 of FY '12.
As it relates to our ongoing objective to return cash to shareholders, in the fourth quarter, we repurchased or redeemed 14.5 million shares for $1.1 billion at an average share price of $75.57 per share. For the full year, we repurchased or redeemed 34.4 million shares for $2.5 million at an average price of $74.05 per share.
Earlier today, we announced that our Board of Directors declared a semiannual cash dividend of $0.93 per share. This dividend will be paid on November 15 and represents a $0.12 per share or 15% increase over the previous semiannual dividend we declared in March. So before I turn things back over to Pierre, let me just briefly summarize where we landed for the full year across the key elements of our business outlook.
Again, new bookings were $33.3 billion, in the upper half of our guided range for the year. Net revenues grew 4% in local currency for the full year, at the top end of our most recent guided range and just below the low end of the range provided at the beginning of the year. Even though the second half of the year didn't materialize as we originally expected, we did grow faster than the market and take share, which is an important objective for our business.
As a reminder, we had 2 unusual items that impacted certain full year metrics in fiscal '13, for which we provided outlook ranges on both a GAAP and an adjusted basis. So excluding the impact, adjusted operating margin was 14.2%, within our most recent guided range and a 30 basis point expansion over last year and very importantly, incorporates a significant increase in our investments, including acquisitions, as we continue to position the business for future growth.
Adjusted EPS was $4.21, toward the upper end of our most recent guided range and 10% growth over fiscal '12. Free cash flow was just over $2.9 billion, slightly above the upper end of our previously guided range.
Finally, we returned $3.7 billion of cash to shareholders, approximately $400 million above our initial objective, through $2.5 billion in share repurchases and $1.1 billion in dividend payments we made during the fiscal year. In addition, we reduced our weighted average diluted shares outstanding by about 2%.
So all in all, in a market that grew less than we expected, our results continued to reflect rigor and discipline in the way we manage and drive our business. Once again, we've proven our ability to adapt our business as the environment evolves and to deliver results, which overall were very much aligned to the outlook that we set at the start of the fiscal year.
Back to you, Pierre.
Thank you, David. In a fast-changing market environment, we continue to execute our growth strategy in a highly focused and disciplined way. We are providing differentiated services across the full spectrum of our capabilities that are resonating with the needs of our clients. We continue to invest in our industry and technology capabilities to further differentiate Accenture in the marketplace, particularly in areas that will help us capture new ways of growth, such as digital marketing, mobility, analytics and cloud.
In fiscal year '13, we made significant investments including $800 million in acquisitions to enhance our ability to help clients compete in the new digital world. We are helping a leading European retailer enhance its customer experience by combining our capabilities in retail and Accenture Interactive, including our recent Fjord acquisition, as well as mobility and analytics. We are delivering seamless integration across all channels, including the client's 750 store locations.
In Belgium, we are working with Belgacom, the country's largest telecommunications company, and BNP Paribas Fortis to create the country's first mobile wallet. When fully deployed, the new solution, which is based on the Accenture Mobility platform, will enable secure shopping and payments via a smartphone.
We also continue to invest in new and innovative end-to-end business services that leverage our industry skills and combine our capabilities across management consulting, technology and business process outsourcing to deliver tangible outcomes for our clients.
In banking, we are strengthening our capabilities in Accenture Credit Services through 2 recent acquisitions. In Q4, we acquired Mortgage Cadence in the U.S., adding an advanced loan origination software platform. And just last week, we acquired a majority stake in Vivere Brasil, a leading mortgage processing technology company in the rapidly developing Brazilian mortgage market.
In capital markets, we created Accenture Post-Trade Processing, a new business service to provide clearing and settlement of equities and bonds for investment banks. This service, which is priced by the transaction, should help clients cut their securities processing cost by about 30%. We are already working with our first client, Societe Generale, and have several others in the pipeline.
And in the hospitality industry, we launched Accenture Hospitality Services to capture the growth opportunities we see in providing finance, accounting and related services to hospitality companies. We are working with our first client, Marriott, and their franchise hotel owners to deliver significant cost savings.
At the same time that we invest in innovative business services, we remain extremely focused on supporting our clients in their large-scale transformation programs as demonstrated by our 11 bookings over $100 million in Q4, which you heard David mention. Our clients continue to focus on driving more productivity and effectiveness in their operations, and this is generating demand for our core services.
We are in the early stages of helping a global agribusiness company, with 30,000 employees, transform its business through an ERP implementation across 140 countries. We will help and answer client's efficiency and decision-making, supporting its global expansion plans.
And we're working with Vodafone on a major IT transformation, based on an integrated global ERP solution from SAP, as well as cutting-edge technology for mobility and analytics. More than 85,000 employees across 20 operating companies are now live on the platform. Vodafone has benefited from more transparent information and standardized processes that will improve reporting, drive better decision making and enhance risk management.
And just this morning, we announced an IT collaboration with Telenor, a leading global telecommunications provider, to manage the development and maintenance of IT systems with the mobile value chain.
From a geographic standpoint, needless to say, we are living in an interesting world. A year ago, the big questions were around Europe and the sovereign debt issue. It now seems that Europe is stabilizing and even showing some early signs of improvement. And today, the question is around the emerging markets, where we're seeing more volatility. In that context, the geographic diversity of our business continues to serve us well as we have a significant footprint in most of the major markets in the world.
Looking at the United States, our largest market, I couldn't be more pleased with our performance. We, again, delivered double-digit revenue growth in the U.S. for both the quarter and the full year, and we increased our market share. In our priority emerging markets, for the full year, we continued to grow at a faster rate at Accenture overall.
That said, it was a challenging year for our business in Brazil, and we expect to see stronger growth in fiscal year '14. At the same time, we were very pleased to see continued strong double-digit revenue growth for the year in China, India, the Middle East and Mexico.
In closing, at a time where volatility and uncertainty are still the name of the game, we continue to focus on driving our own competitiveness, applying rigor and discipline across the board to increase our efficiency and expand our margins. And this is giving us the capacity to invest in the business to continue to capture new ways of growth.
Before I hand back to David, I want to thank our people at Accenture for their significant contribution to our fiscal year results. Our people are extraordinarily committed to the success of our clients and bring their unique knowledge and capabilities to their work every day.
And with that, I will turn the call over to David to provide our fiscal year '14 business outlook. David, over to you.
David P. Rowland
Thanks, Pierre. Before I provide our business outlook, let me share some thoughts on how we see the overall environment and the implications on our view of fiscal '14.
For the past 4 to 5 quarters, it's clear that our addressable market has been in a cycle of lower growth, and this has certainly impacted our growth. As we look forward, we think it's likely that our overall market conditions won't change much in the near term. In other words, it will be more the same. Regardless of how the market evolves, we are driving our business throughout the cycle to grow faster than the market.
Turning now to our business outlook. For the first quarter of fiscal '14, we expect the revenues to be in the range of $7 billion to $7.3 billion. This assumes a foreign exchange impact of approximately negative 2% compared to the first quarter in fiscal '13.
For the full fiscal year '14, based upon how the rates have been trending over the last few weeks, we currently assume the impact of foreign exchange on our results in U.S. dollars to be negative 1% compared to fiscal '13. For the full fiscal year '14, we expect Accenture's net revenue to be in the range of 2% to 6% growth in local currency over fiscal '13.
For the full fiscal year '14, we're targeting new bookings to be in the range of $32 billion to $35 billion. And in consulting, we expect quarter 1 bookings to be similar to the last 2 quarters.
For operating margin, we expect fiscal year '14 to be in the range of 14.3% to 14.5%, a 10 to 30 basis point expansion over adjusted fiscal '13 results. We expect our annual effective tax rate to be in the range of 26.5% to 27.5%. For earnings per share, we expect full year diluted EPS for fiscal '14 to be in the range of $4.42 to $4.54 or a 5% to 8% increase over adjusted fiscal '13 results.
Now turning to cash flow. For the full fiscal '14, we expect operating cash flow to be in the range of $3.6 billion to $3.9 billion; property and equipment additions to be approximately $400 million; and free cash flow to be in the range of $3.2 billion to $3.5 billion.
Finally, we expect to return at least $3.7 billion through dividends and share repurchases and also expect to reduce the weighted average diluted shares outstanding by approximately 2% as we remain committed to returning a substantial portion of our cash to our shareholders.
With that, let's open it up so that we can take your questions. KC?
Thanks, David. [Operator Instructions] Paul, would you provide instructions for those on the call?
Earnings Call Part 2: