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Accenture plc (ACN) Q2 2014 Results Earnings Conference Call March 27, 2014 8:00 AM ET
Executives
KC McClure - Director of IR
Pierre Nanterme - Chairman and CEO
David P. Rowland - CFO
Analysts
Tien-Tsin Huang - JPMorgan Chase & Co.
Joseph D. Foresi - Janney Montgomery Scott LLC
Keith Bachman - BMO Capital Markets
Jason Kupferberg - Jefferies & Co.
Edward Caso - Wells Fargo Securities
James Friedman - SIG
Bryan Keane - Deutsche Bank
Kathryn L. Huberty - Morgan Stanley
Darrin Peller - Barclays Capital
Ashwin Shirvaikar - Citigroup Inc.
Operator
Ladies and gentlemen, good morning. Thank you for standing by, and welcome to Accenture's Second Quarter Fiscal 2014 Earnings Conference Call. At this time, all lines are in listen-only mode. Later there will be an opportunity for your question and instructions will be given at that time. (Operator instructions) And as a reminder, today's conference is being recorded.
I would now like to turn the conference over to our host, Managing Director of Investor Relations, Ms. KC McClure. Please go ahead.
KC McClure
Thank you, Tom. And thanks everyone for joining us today on our second quarter fiscal 2014 earnings announcement. As Tom 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 then take you through the financial details including income statement and balance sheet along with some key operational metrics for the second quarter.
Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the third 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 reimbursement 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 on 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. As a reminder, in Q2 of last year our results included benefits from final determinations of prior year U.S. Federal tax liabilities and a reduction in reorganization liabilities.
We include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section of our website at www.accenture.com . As always, Accenture assumes no obligation to update the information presented on this conference call.
Now, let me turn the call over to Pierre.
Pierre Nanterme
Thank you, KC. And thanks everyone for joining us today. Our results for the second quarter were pretty much in line with our expectations. We achieved record new bookings, delivered revenues within our guided range and grew earnings per share while continuing to return substantial cash to our shareholders.
Here are a few highlights. We delivered outstanding new bookings of more than $10 billion, including record consulting bookings of $4.6 billion and record outsourcing bookings of $5.5 billion.
We generated revenues of $7.1 billion, a 3% increase in local currency and above the midpoint of our guided range. Earnings per share were $1.03, compared to $1 on an adjusted basis in the second quarter last year. Operating margin was 13.3%, which is flat compared to the second quarter last year on an adjusted basis.
Our balance sheet remains very strong ending the quarter with a cash balance of $3.7 billion. And we continued to return cash to shareholders through share repurchases and dividends.
Today, we announced a semiannual cash dividend of $0.93 per share which will bring total dividend payments for the year to $1.86 per share, a 15% increase over last year.
So, overall, we're pleased with our results for the first half of fiscal year 2014 and are encouraged by our very strong bookings of nearly $19 billion year-to-date, which position us well for the second half.
We have updated our business outlook for the full fiscal year and David will cover it later in the call. Over to you, David.
Dave P. Rowland
Thanks, Pierre. And as always, it's great to have the opportunity to talk with you about our financial results and how we're positioned for the full year.
Before I get into the detailed results for the quarter, let me start by providing a few overall highlights. Our second quarter results reflected some clear areas of strength, but also some areas where we expect to perform better in the second half of the year.
The bright spot was clearly in our new bookings where we posted $10.1 billion, setting new records in several areas of our business and providing further indication of how our differentiated capabilities are resonating with the market.
Net revenues landed in the general zone that we expected, with 3% local currency growth, slightly above the midpoint of our guided range.
On the profitability front, our operating margin for quarter two was flat with last year, resulting in 20 basis points of expansion for the first half of the year, solidly in our annual guidance range, but does reflect pricing and cost pressures in certain areas of our business which we're working hard to address.
At the same time, we continued to invest at higher levels in our business and return a significant portion of our cash to our shareholders. So, all in all, quarter two was a solid quarter.
With that, let's get to the numbers, starting with new bookings. New bookings for the quarter were extremely strong at $10.1 billion, representing an all-time high. Consulting bookings were $4.6 billion, with a book-to-bill of $1.2 billion. Outsourcing bookings were $5.5 billion, with a book-to-bill of $1.6 billion.
Looking further at our new bookings, there are several additional insights worth noting. Consulting new bookings were the highest quarter on record, building on our strong consulting bookings performance in quarter one. We saw good demand in both systems integration and management consulting, with both posting book-to-bills above the upper end of our target range.
Outsourcing bookings were also at an all-time high, driven by extremely strong record bookings in BPO, where the demand environment remains robust and where we saw particularly high demand for our finance and accounting offerings.
Technology outsourcing bookings were a little lighter this quarter; following strong bookings performance in quarter one.
From an operating group perspective, CMT and Financial Services were the primary drivers to our strong bookings performance, which further strengthens their position for higher growth in the second half of the year.
And finally, our results include 10 clients with bookings in excess of $100 million, as we continue to be the business partner of choice for helping our clients tackle their largest, most complex projects.
Turning now to revenues. Net revenues for the quarter were $7.13 billion, an increase of 1% in U.S. dollars and 3% in local currency, reflecting a negative 1.5% FX impact, consistent with the assumption we provided in December.
Consulting revenues for the quarter were $3.7 billion, down 1% in U.S. dollars and flat in low local currency. Outsourcing revenues were $3.4 billion, up 4% in U.S. dollars and 5% in local currency.
Let me give you some highlights from the operating groups this quarter. Financial Services grew 5% in local currency with broad based double-digit growth in capital markets as well as continued strength in outsourcing overall.
We're very pleased with growth rates in both EMEA and Asia-Pacific, and continue to be focused on driving improved growth rates in North America.
Once again, our Products operating group delivered a very consistent level of growth, well above the Accenture average growth rate, at 5% growth in quarter two. The revenue drivers were similar to last quarter, meaning we continued to see broad based growth with positive growth in both consulting and outsourcing in all three geographic areas and in the majority of our industry segments.
CMT returned to growth at 2% this quarter and we continue to see signs of positive momentum driven by demand for transformation-led value-driven projects. Our efforts to focus the business on new growth areas continue and we're seeing the impact in strong consulting growth across all of our geographic regions. The Americas region continues to be the primary driver of growth, especially in electronics and high tech.
H&PS growth for the quarter was 1%. And while we did signal some moderation in growth from quarter one, growth in the quarter was a little lower than we expected. Our Health business continued to have strong growth, particularly in the Americas. Our Public Service business had a modest decline in the quarter as the environment in Europe continues to be challenging.
Looking ahead, we expect a ramp-up in H&PS growth in the second half of the year, beginning with a significant uptick in quarter three.
Resources growth was flat in quarter two. The energy business continues to be the real bright spot globally with double-digit growth. But cyclical challenges in natural resources continue to negatively impact the overall growth rate of our Resources business. Having said that, we do still expect to have positive growth for the year.
Before moving down the income statement, let me provide some overall context on the factors impacting our profitability this quarter.
Specifically, our operating results for the quarter reflect lower contract profitability, primarily driven by pricing pressures and our challenge in absorbing higher payroll cost and to a lesser extent, lower margins in the early stages of a few large contracts.
At the same time, our results also reflect a higher level of investment in the quarter to build new capabilities, including strategic acquisitions aimed at enhancing our capabilities in key growth areas.
And while we have accrued a significant amount of variable compensation this year, we did accrue a lower amount in quarter two compared to the second quarter last year, which offset the factors previously mentioned.
This lower variable compensation expense reduced accrued payroll in the balance sheet and is the primary driver for the reduction in our free cash flow guidance for the year, which I'll cover later.
To be clear, our profitability does vary quarter-to-quarter and it's normal for us to have certain periods where we have areas of cost pressure which require intervention. And as always, we understand the areas that need attention and we're taking action at speed and with the rigor and discipline that our investors have come to expect.
Now to the numbers. Gross margin for the quarter was 31.3% compared with 31.6% for the same period last year, down approximately 30 basis points.
Sales and marketing expense for the quarter was 11.7% of net revenues compared with 11.8% of net revenues for the second quarter last year, down about 10 basis points.
General and administrative expense was 6.2% of net revenues compared with 6.5% of net revenues for the second quarter last year, down approximately 30 basis points.
As a reminder, we had two unusual items that impacted certain metrics in quarter two of last year. The following comparisons exclude the impact and reflect adjusted results.
Operating incomes was $951 million in the second quarter, reflecting a 13.3% operating margin, equal to the adjusted operating margin for the same period last year.
Our effective tax rate for the quarter was 24% compared with an adjusted tax rate of 24.8% for the second quarter last year.
Net income was $722 million for the second quarter compared with adjusted net income of $720 million for the same quarter last year.
Diluted earnings per share were $1.03, compared with adjusted EPS of $1 in the second quarter last year, an increase of $0.03.
Turning to DSOs, our days services outstanding continued to be industry leading. They were 33 days, down slightly from 34 days last quarter. Free cash flow for the quarter was $216 million resulting from cash generated by operating activities of $292 million, net of property and equipment additions of $76 million.
Cash flows for the quarter and year-to-date have also been impacted by lower accrued variable compensation expense, which I previously noted.
Moving to our level of cash. Our cash balance at February 28 was $3.7 billion compared to $5.6 billion at August 31 last year. The current levels reflects the cash returned to shareholders through repurchases and dividends as well as the higher level of acquisitions we've made in the first half of this year.
Moving to some other key operational metrics. We ended the quarter with a global headcount of about 289,000 people and we now have approximately 192,000 people in our global delivery network. In quarter two, our utilization was 87%, consistent with last quarter and slightly down from quarter two last year.
Attrition which excludes involuntary terminations was 12%, up approximately 1% from both quarter one in the same period last year. And lastly, we continue to expect that at least 60,000 people will join our company in fiscal 2014.
Turning to our ongoing objective to return cash to shareholders. In the second quarter, we repurchased or redeemed approximately 9.2 million shares for $739 million at an average price of $80.40 per share.
Year-to-date, we have purchased 18.9 million shares for approximately $1.5 billion at an average price of $77.25 per share. At February 28, we had approximately $5.8 billion of share repurchase authority remaining.
As Pierre mentioned, our Board of Directors declared a dividend of $0.93 per share, representing a 15% increase over the dividend we paid in May last year and this dividend will be paid on May 15th, 2014.
So, in summary, with the first half of the year behind us, we're generally where we expected to be at this point in time. We see definite signs of building momentum in the market and in many areas of our business, yet the environment continues to be challenging and we're focused on what we need to do to deliver the year.
Our focus, as always, is to leverage our strong position in the marketplace to capture the growth potential we see and to proactively manage the operations of our business to maximize profit, cash generations, and our overall return to our shareholders.
With that, let me turn it back to Pierre.
Pierre Nanterme
Thank you, David. At Accenture, we're extremely focused on executing our growth strategy. And our record new bookings for the second quarter and for the first half of the year demonstrate that our services remain highly differentiated and are clearly resonating with the needs of our clients.
One of the things that truly sets Accenture apart is that we combine our capabilities across consulting, digital, technology and business process outsourcing to deliver tangible results for our clients.
Let me bring this to life with some key wins in the second quarter. We were selected by a global communications equipment company to provide HR, IT and finance and accounting services as part of a multi-year business transformation that is expected to deliver cost savings of more than $1 billion.
We signed a long-term agreement with Monte dei Paschi di Siena, a large Italian bank, to provide finance and accounting, administration and other back office services as part of a strategic restructuring plan to enhance the bank's competitiveness in the marketplace.
We were also selected by a high tech leader in security systems to support the company's transformation across more than 90 countries. We will provide HR, finance and accounting and procurement services, leveraging our recent Procurian acquisition to reduce costs and improve operational efficiency.
And I'm personally very pleased that a few weeks ago, we announced a unique new business model with SAP that we believe is a true game-changer in the industry. Through the newly formed Accenture and SAP Business Solutions Group, which includes dedicated experts from both companies, will jointly develop integrated, industry-specific and cloud-based solutions.
Our broad industry and technology capabilities have enabled us to build long and enduring client relationships with the world's leading companies. We continue to operate at the heart of our clients' businesses, especially when it comes to executing large scale, mission-critical programs that deliver tangible outcomes.
For China Electric, we designed, implemented, and deployed a salesforce.com solution to more than 26,000 users in 100 countries, the largest sales force implementation in Europe. The new cloud-based solution has already delivered value by increasing cross-selling and account coverage by 20%.
For Endesa, one of the world's largest electric power companies, we're supporting the rollout of more than 13 million smart meters in Spain. Through a multi-year business process outsourcing agreement, we're facilitating the expansion of smart metering operations and integrating existing billing systems and business processes.
And for a global pharmaceutical company, we're arming sales reps with a variety of digital technologies across tablets, smartphones and PCs, to deliver a personalized user experience to doctors in more than 200 countries. These new digital promotion and sales program has already delivered $15 million in savings.
Turning now to the geographic dimension of our business. In the Americas, we grew revenues 4% in local currency, which is consistent with Q1. Growth was driven by the United States and we're pleased that our business in Brazil is starting to turn the corner.
In EMEA, revenues were flat in local currency compared to the second quarter last year. We're starting to see good pickup in growth in important countries such as Switzerland, the U.K., Italy, Germany and France. And in Asia-Pacific, we grew revenues 4% in local currency, driven by continued strong growth in Japan.
Before I close, I want to share something I'm personally very proud of. You have often heard me speak about our diamond clients, which are our largest client relationships and increasing the number of diamond clients is clearly a priority for us to drive more growth.
I am pleased that we added 16 new diamond clients in the first half of the fiscal year, which brings us to a net total of 138 diamond clients, an all-time high.
Before I hand back to David, I want to comment on the global economic environment which, frankly, continues to be challenging especially in the emerging markets. As you would expect, we're carefully monitoring the recent geopolitical developments in Eastern Europe, which are introducing an additional level of uncertainty in the marketplace.
That said, given our strong bookings year-to-date and the level of activity we're seeing, I continue to feel confident that we're well-positioned to drive more growth in the second half of the year.
With that, I will turn it back to David who will provide our business outlook for Q3 and the full fiscal year.
Dave P. Rowland
Thanks, Pierre. Let me now turn to our business outlook and let me start by saying based on where we are for the first half of the year, we've of updated most of the metrics in our business outlook.
For the third quarter of fiscal 2014, we expect revenues to be in the range of $7.4 billion to $7.65 billion, this assumes the impact of FX will be flat compared to the third quarter of fiscal 2013.
For the full fiscal year 2014, based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be negative 0.5% compared to fiscal 2013.
With strong bookings in the first half of the year, balanced with 3% revenue growth year-to-date, we now expect net revenue for the full fiscal 2014 to be in the range of 3% to 6% growth in local currency. For the full fiscal year 2014, we now expect new bookings to be in the range of $33 billion to $36 billion.
For operating margin, we continue to expect fiscal 2014 to be in the range of 14.3% to 14.5%, a 10 to 30 basis point expansion over adjusted fiscal 2013 results. We now expect our annual effective tax rate to be in the range of 25.5% to 26.5%.
For earnings per share, we now expect full year diluted EPS for fiscal 2014 to be in the range of $4.50 to $4.62 or 7% to 10% growth over adjusted fiscal 2013 results.
Turning to cash flow. We now expect operating cash flow to be in the range of $3.3 billion to $3.6 billion, with property and equipment additions remaining at approximately $400 million, and free cash flow now in the range of $2.9 billion to $3.2 billion.
We've lowered our cash flow guidance to reflect our updated assumption that we will accrue lower variable compensation due to higher current year operational spending as compared to what we assumed in our original guidance range.
Finally, we continue to expect to return at least $3.7 billion through dividends and share repurchases and also now expected to reduce the weighted average diluted shares outstanding by approximately 3%, as we remain committed to returning a substantial portion of cash to our shareholders.
With that, let's open it up, so that we can take your questions. KC?
KC McClure
Thanks, David. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask a question. Tom, would you provide instructions for those on the call, please?
Earnings Call Part 2:
- Information Technology
- Investment & Company Information
- Accenture
