Accenture : Second Quarter Fiscal 2023 Earnings Conference Call Transcript

Accenture

Second Quarter Fiscal 2023

Financial Results

Conference Call Transcript

Thursday, March 23, 2023 / 8:00 a.m. Eastern

CORPORATE PARTICIPANTS

Katie O'Conor - Managing Director, Head of Investor Relations Julie Sweet - Chair and Chief Executive Officer

KC McClure - Chief Financial Officer

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Katie O'Conor

Thank you, operator, and thanks, everyone, for joining us today on our second quarter fiscal 2023 earnings announcement. As the operator just mentioned, I'm Katie O'Conor, Managing Director, Head of Investor Relations. On today's call, you will hear from Julie Sweet, our Chair and Chief Executive Officer; and KC McClure, 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. Julie will begin with an overview of our results. KC will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the second quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2023. We will then take your questions before Julie provides a wrap-up at the end of the call.

Some of the matters we'll discuss on this call, including our business outlook, are forward- looking and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call.

During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. 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 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 Julie.

Julie Sweet

Thank you, Katie, and thank you to everyone joining today, and thank you to our 738,000 people around the globe for your incredible work and commitment to our clients, which has resulted in our delivering another strong quarter of financial results and the broader 360° value we continue to create for all our stakeholders.

Let me share a few highlights of value we created in our continued disciplined execution. I'm very pleased with our record bookings for Q2 at $22.1 billion, our highest ever including 35 clients with quarterly bookings greater than $100 million, our second highest quarter on record for such bookings, representing the continued trust that our clients have in us. We delivered revenues of $15.8 billion, representing 9% growth in local currency, bringing us to $31.6 billion of revenue at 12% growth through H1, and we continued gaining market share, growing approximately 2x the market.

We continued our inorganic investments with six acquisitions in strategic areas, including cloud with the acquisition of SKS in Europe, which will expand our specialized technology, consulting and regulatory capabilities, enabling us to better serve our financial services

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clients; security with the acquisition of Morphus in Brazil, a cyber defense risk management, cyber threat intelligence service provider; and supply chain with the acquisition of Inspirage in the U.S., which will enhance our technology capabilities to accelerate innovation for clients through emerging technologies such as touchless supply chain and digital twins.

We also continued our investment in our people with 10.3 million training hours, a 12% increase year-over-year. We are optimizing our business to lower costs in fiscal year 2024 and beyond, while continuing to invest in our business and our people to capture the significant growth opportunities ahead. KC will be giving you more detail on these actions.

Finally, we believe our focus on creating 360° value differentiates us in our market. We earned the #1 position in our industry for the 10th year in a row and #32 overall on Fortune's list of the world's most admired companies. We ranked #1 in our industry and #4 overall on the Just Capital list of America's most just companies. And we have been recognized by Ethisphere as one of the world's most ethical companies for the 16th year in a row.

I'm very pleased that our results demonstrate once again that our strategy to be the execution partner of choice for transformation, lead in the five forces and have a diverse business across markets, industries and services continues to allow us to lead and take market share. And in a world in which all strategies lead to technology, we have distinguished ourselves and our impact in the market.

Over to you, KC.

KC McClure

Thank you, Julie, and thanks to all of you for taking the time to join us on today's call. We were pleased with our overall results in the second quarter, setting a new bookings record at $22.1 billion, $2.5 billion higher than our previous record set in Q2 of last year with consulting bookings close to matching our previous record. We delivered revenue growth for the quarter at the top end of our guided range as we continue to deliver on our shareholder value proposition.

Before I summarize results for the quarter, let me spend a moment on the business optimization actions we are taking to reduce costs for fiscal '24 and beyond, which includes streamlining operations, transforming our nonbillable corporate functions and consolidating office space.

We estimate costs of $1.5 billion through fiscal year 2024, of which we expect to incur approximately $800 million in FY '23 and $700 million in FY '24, comprised of approximately $1.2 billion in severance and $300 million for the consolidation of office space. These actions are expected to impact roughly 2.5% or 19,000 of our current workforce, of which over half are nonbillable corporate functions and include over 800 of our more than 10,000 leaders across our markets and services. Nearly half of the 19,000 people will depart by the end of fiscal year '23.

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Now let me summarize a few of the highlights for the quarter. Revenues grew 9% in local currency, driven by broad-based growth across all markets with more than half of our 13 industries growing double digits. We also continue to extend our leadership position with growth estimated to be about 2x the market, which refers to our basket of publicly traded companies.

In Q2, we recorded $244 million in costs associated with the business optimization actions, which impacted operating margin by 150 basis points and EPS by $0.30. The following comparisons exclude these impacts and reflect adjusted results.

We delivered adjusted EPS in the quarter of $2.69, reflecting 6% growth over EPS last year. Adjusted operating margin of 13.8% increased 10 basis points, with 20 basis points expansion year-to-date and includes continued significant investments in our people and our business. Finally, we delivered free cash flow of $2.2 billion and returned $1.8 billion to shareholders through repurchases and dividends. Year-to-date, we've invested $1.1 billion in acquisitions, primarily attributed to 15 transactions.

With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were a record at $22.1 billion for the quarter, representing growth of 17% in local currency with an overall book-to-bill of 1.4. Consulting bookings were $10.7 billion with a book-to-bill of 1.3. Managed service bookings were also a record at $11.4 billion with a book-to-bill of 1.5. We were very pleased with the strength of our new bookings, which were broad-based, delivering a very strong book-to-bill across all of our geographic markets and across our services with a book-to-bill of 1.5 in operations, 1.4 in technology and 1.3 in strategy and consulting.

Turning now to revenues. Revenues for the quarter were $15.8 billion, a 5% increase in U.S. dollars and 9% in local currency, and were at the top end of our range, adjusting for a foreign exchange headwind of approximately 4% compared to the 5% provided last quarter. Consulting revenues for the quarter were $8.3 billion, a decline of 1% in U.S. dollars and an increase of 4% in local currency. Managed services revenue were $7.5 billion, up 12% in U.S. dollars and 16% in local currency.

Taking a closer look at our service dimensions. Technology services and operations grew double digits, and strategy and consulting declined mid-single digits.

Turning to our geographic markets. In North America, revenue growth was 5% in local currency, driven by growth in public service, health and utilities. These increases were partially offset by a decline in communications and media and high tech. Revenue growth was driven by the United States.

In Europe, revenues grew 12% in local currency, led by growth in industrial, banking and capital markets and public service. Revenue growth was driven by Germany, Italy and France.

In growth markets, we delivered 14% revenue growth in local currency, driven by growth in

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banking and capital markets, chemical and natural resources and public service. Revenue growth was led by Japan.

Moving down the income statement. Gross margin for the quarter was 30.6% compared with 30.1% for the same period last year. Sales and marketing expense for the quarter was 9.9% compared to 9.4% for the second quarter last year. General and administrative expense was 6.8% compared to 7% for the same quarter last year. Adjusted operating income was $2.2 billion in the second quarter, reflecting an adjusted 13.8% operating margin, an increase of 10 basis points from operating margin in the second quarter of last year. Our effective tax rate for the quarter was 20.4% compared with an effective tax rate of 19.2% for the second quarter last year.

Adjusted diluted earnings per share were $2.69 compared with diluted EPS of $2.54 in the second quarter last year. Days services outstanding were 42 days compared to 48 days last quarter and 41 days in the second quarter of last year.

Free cash flow for the quarter was $2.2 billion compared to approximately $400 million last quarter, resulting from cash generated by operating activities of $2.3 billion, net of property and equipment additions of $108 million. Our cash balance at February 28 was $6.2 billion compared with $7.9 billion at August 31.

With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased or redeemed 4.1 million shares for $1.1 billion at an average price of $273.55 per share. As of February 28, we had approximately $4.2 billion of share repurchase authority remaining. Also in February, we paid a quarterly cash dividend of $1.12 per share for a total of $708 million. This represents a 15% increase over last year. And our Board of Directors declared a quarterly cash dividend of $1.12 per share to be paid on May 15, a 15% increase over last year.

Finally, turning to the 360° value we are creating for all our stakeholders. We are partnering with Save the Children to connect with new audiences and invigorate donors through fundraising and creative campaign excellence.

So at the halfway point of fiscal '23, we are pleased with our results.

Now let me turn it back to Julie.

Julie Sweet

Thank you, KC. I will start with the overall demand environment, which is more of the same. We believe that the ongoing volatility and uncertainty in the macro environment is making it even clearer to clients that they need to change more, not less. And that 2 of the 5 key forces of change that we have identified for the next decade, the need for total enterprise reinvention and the ability to access, create and unlock the potential of talent are critical to succeed in the near, medium and long term.

We see two common themes. First, all strategies continue to lead to technology, particularly

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