Accenture : Third Quarter Fiscal 2023 Earnings Conference Call Transcript

Accenture

Third Quarter Fiscal 2023 Financial

Results

Conference Call Transcript

Thursday, June 22, 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 joining us today on our third 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 third quarter. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the fourth 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 people around the world for their dedication and commitment, which is how we are able to consistently deliver 360 degree value for all our stakeholders -- our clients, our people, our shareholders, our partners and our communities.

Turning to the quarter, I will start with the financials. While the macro environment continues to be uncertain overall, in Q3, we delivered solid revenue and sales with very strong profitability and very strong free cash flow while continuing to significantly invest in our business.

Now getting into the highlights, we had bookings of $17.2 billion, including 26 clients with quarterly bookings greater than $100 million, bringing the total year-to-date to 85, which is 11 more than the same time last year. We delivered revenues of $16.6 billion, representing

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5% growth with North America growing 2%, Europe at 7% and Growth Markets at 9%, all in local currency, bringing us to $48.1 billion of revenue at 10% growth fiscal year-to-date.

Revenues were impacted by lower-than-expected small deal sales, especially in strategy & consulting and systems integration, and lower-than-expected results in the communications, media and high-tech industry group for the quarter. Excluding CMT, our business grew 8% globally, 7% in North America, 9% in Europe and 10% in Growth Markets in local currency.

We expanded adjusted operating margin by 20 basis points, grew adjusted EPS 14% over last year and delivered free cash flow of $3.1 billion. And over the past 11 quarters, we have operated at 91% or higher utilization, leveraging our digital enterprise to connect our sales, staffing, hiring and skill needs to make proactive real-time decisions.

We are on track with the business optimization actions to lower costs in fiscal 2024 and beyond, while continuing to significantly invest in our business with 5 acquisitions in strategic areas this quarter, bringing the total investment in acquisitions year-to-date to $1.3 billion. We invested in cloud, data and AI with the acquisition of Nextira in North America, Objectivity in the U.K. and Einer in Norway. We also invested in sustainability with the acquisition of Green Domus in Brazil, and in modern ERP services with Bourne Digital in Australia. We continue to take market share, growing about 2 times the market.

Now turning to other aspects of the 360 degree value we delivered in the quarter. We continue to invest in learning for our people with 9 million training hours in the quarter, representing an average of 13 hours per person, giving them the skills to grow as our clients' needs evolve. We are incredibly pleased that we're recognized as a top 10 places to work in 7 countries: Argentina, Brazil, Chile, India, Mexico, the Philippines and the U.S. Collectively, these countries represent nearly 70% of our people.

Vibrant communities are important for our business success and digital skilling helps ensure vibrant communities thrive. In collaboration with L'Oreal and our NGO partner, Shambhav Foundation, we are supporting women in India to build digital literacy skills alongside the technical skills needed to access jobs in the beauty industry. Together, we have collectively created sustainable livelihoods for 2,500 women across 10 states in India, accelerating quality, delivering social impact in the community and continuing our commitment to embed diversity and inclusion in everything we do.

Finally, this year, we are proud to earn the #22 position on BrandZ's prestigious Top 100 Most Valuable Global Brands list, our highest rank to date.

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 are pleased with our third quarter results and we are on track to deliver or exceed all aspects of our guidance provided in September on an adjusted basis.

Now let me summarize a few of the highlights for the quarter. Revenues grew 5% in local currency, driven by single or double-digit growth in 7 of our 13 industries. While we've been highlighting the pressures in our CMT industry group all year, this quarter, the revenue was

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lower than expected with a decline of 8% in local currency. We delivered adjusted EPS in the quarter of $3.19, reflecting 14% growth over EPS last year. Adjusted operating margin was 16.3%, an increase of 20 basis points over Q3 last year, and includes continued significant investments in our people and our business. Finally, we delivered free cash flow of $3.1 billion and returned $1.5 billion to shareholders through repurchases and dividends. Year-to- date, we've invested $1.3 billion in acquisitions, primarily attributed to 20 transactions.

With those high-level comments, let me turn to some of the details, starting with new bookings. New bookings were $17.2 billion for the quarter, representing growth of 4% in local currency with an overall book-to-bill of 1.0. We were very pleased with our 26 clients with quarterly bookings over $100 million. Consulting bookings were $8.9 billion with a book-to-bill of 1.0. Managed services were $8.3 billion with a book-to-bill of 1.1.

Turning now to revenues. Revenues for the quarter were $16.6 billion, a 3% increase in U.S. dollars and 5% in local currency, reflecting a foreign exchange headwind of approximately 2.5% compared to the approximately 3.5% headwind provided in our business outlook last quarter. Consulting revenues for the quarter were $8.7 billion, a decline of 4% in U.S. dollars and 1% local currency. We see the same level of Consulting decline in Q4. Managed Services revenues were $7.9 billion, up 10% in U.S. dollars and 13% in local currency.

Taking a closer look at our service dimensions. Technology services grew high-single-digits. Operations grew double-digits, and we expect high single-digit growth in Q4. Strategy and Consulting declined high-single-digits this quarter, and we see declines continuing in Q4. Regarding our market share, we extended our leadership position with growth estimated to be about two times the market, which refers to our basket of publicly traded companies. Now as a reminder, we assess market growth against our investable basket, which is roughly two dozen of our closest global public company competitors, which represents about a third of our addressable market. We used a consistent methodology to compare our financial results and theirs, adjusted to exclude the impact of significant acquisitions through the date of their last publicly available results.

Turning to our geographic markets. In North America, revenue growth was 2% in local currency driven by growth in Public Service for our U.S. federal business, Health and Utilities. These increases were partially offset by declines in Communications & Media, High- Tech, Software & Platforms and Banking & Capital Markets. In Europe, revenue grew 7% in local currency, led by growth in Banking & Capital Markets, Industrial and Public Service. Revenue growth was driven by Italy, Germany and France. In Growth Markets, we delivered 9% revenue growth in local currency, driven by growth in Public Service, Chemicals and Natural Resources and Banking & Capital Markets. Revenue growth was driven by Japan.

Moving down the income statement. Gross Margin for the quarter was 33.4% compared with 32.9% for the same period last year. Sales and Marketing expense for the quarter was 10.5% compared to 10.3% for the third quarter last year. General and Administrative expense was 6.5% compared to 6.5% for the same quarter last year.

Before I continue, I want to note that in Q3, we recorded $347 million in costs associated with the business optimization actions we announced last quarter, which decreased operating margin by 210 basis points and EPS by $0.42. This quarter, we also recognized a gain in our investment in Duck Creek Technologies, which impacted our tax rate and increased EPS by $0.38. The following comparisons exclude these impacts and reflect adjusted results.

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Adjusted operating income was $2.7 billion in the third quarter and adjusted 16.3% operating margin, an increase of 20 basis points from operating margin in the third quarter of last year. Our adjusted effective tax rate for the quarter was 24% compared with an effective tax rate of 27.1% for the third quarter last year. Adjusted diluted earnings per share were $3.19, compared with diluted EPS of $2.79 in the third quarter last year. Days source outstanding were 42 days compared to 42 days last quarter and 44 days in the third quarter of last year. Free cash flow for the quarter was $3.1 billion, resulting from cash generated by operating activities of $3.3 billion net of property and equipment additions of $142 million. Our cash balance at May 31 was $8.5 billion compared with $7.9 billion at August 31.

With regards to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed 2.8 million shares for $789 million at an average price of $279.65 per share. As of May 31st, we had approximately $3.5 billion of share repurchase authority remaining. Also in May, 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 August 15th, a 15% increase over last year.

So in closing, we remain committed to delivering on our long-standing financial objectives, growing faster than the market and taking share, generating modest margin expansion and stronger earnings while, at the same time, investing at scale for long-term market leadership, generating strong free cash flow and returning cash to shareholders.

Now let me turn it back to Julie.

Julie Sweet

Thank you, KC. As we look at demand in our larger deals, we continue to see two common themes that I've highlighted before. First, the rapid rise of generative AI interest among our clients highlights yet again that all strategies lead to technology, particularly cloud, data, AI and security. And second, companies remain focused on total enterprise reinvention as they execute compressed transformations to achieve lower costs, stronger growth, more agility and greater resilience faster.

Now let me give you more color on the quarter to bring this to life. Starting with the digital core, our cloud momentum continues with very strong double-digit growth in Q3 as clients prioritize building a strong and secure foundation for reinvention. We have been working with ENI, a global energy company, for more than 30 years. Now we are helping them as they continue their hybrid cloud transformation and embark on a total enterprise reinvention strategy with a focus on sustainability, digital transformation and security. We are managing their IT infrastructure and telecommunications integration and helping implement new operating models, all hosted in the ENI Green Data Center, one of the largest data bunkers in the industry to securely hold the company's data. The ENI Green Data Center houses one of the most powerful nongovernmental supercomputers in the world, enabling the highest use of data across the value chain from exploration and production to the energy of the future. New operating models will help exploit the full value of data, AI and cybersecurity for faster adoption of new business processes. This transformation is the first step toward

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