Accenture plc - Class A (ACN) — Q2 2021 Earnings Call Transcript

Thank you, operator, and thanks everyone for joining us today on our second quarter fiscal 2021 earnings announcement. Today’s call will include an overview of our results from Julie Sweet, our Chief Executive Officer, and KC McClure, our Chief Financial Officer. We hope you have 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 2021. We will then take your questions before Julie provides a wrap up at the end of the call. Some of the matters we will 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 metrics, 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. As always, Accenture assumes no obligation to update the information presented on this conference call. Now, let me turn the call over to Julie.

Thank you, Angie, and thank you everyone for joining us. Today, we are proud to announce outstanding financial results for the second quarter of fiscal 2021 and our return to pre-COVID level financial results a quarter earlier than we expected and with a tough compare. Let’s first go back 12 months ago, on March 19, only 8 days after the pandemic was declared, when we were all together to announce our outstanding fiscal year 2020 Q2 financial results. Results you may not remember because at the time, we were all focused on the go-forward potential impact of the pandemic. In Q2 of fiscal year 2020, we had 8% revenue growth in local currency, our then highest bookings ever of $14.2 billion and strong underlying profitability and free cash flow. We also announced that 18 clients that quarter had bookings over $100 million. With this backdrop of fiscal year 2020 Q2, the significance of this Q2’s results in fiscal year 2021 becomes even more clear. We have delivered 5.4% revenue growth in local currency, which includes a reduction of 2 percentage points from a decline in revenue from reimbursable travel costs. Apples-to-apples, 5.4% is in the zone of fiscal year 2020 Q2 revenue when you exclude the travel costs related revenue. We have delivered bookings of $16 billion, beating our previous record set in Q2 last year by $1.8 billion and we have delivered strong profitability and free cash flow. This quarter, 18 clients had bookings over $100 million and we continue to take market share faster than pre-COVID. In the first half of the year, we have accelerated our investment in B&A, with approximately $1.1 billion of capital deployed and we are increasing our programmatic B&A investment to at least $2 billion for fiscal year 2021 from the $1.7 billion we previously communicated. And for the last 12 months, we have remained consistent. We gave guidance every quarter which we met or beat. We deliberately invested in our people and preserved our talent to continue to serve our clients as demand came back and we continued to significantly invest in our business and our communities. Throughout, we have lived our core values, including maintaining our commitment to making more progress on diversity and inclusion and sustainability. These financial results reflect these choices, the strength of our core values, the power of our laser focus on creating client value and being a trusted partner, as well as our incredibly talented people, strong ecosystem relationships, and the resilience of our growth strategy, as well as the substantial investments we have made year in and year out, since we set out to be the leader in digital, cloud and security and continuous innovation. They also reflect the operational rigor and discipline that long has been a hallmark of our success. I want to thank our people for their hard work and continued dedication to our clients and for delivering on our commitments. KC, over to you.

Thank you, Julie, and thanks to all of you for taking the time to join us on today’s call. We were very pleased with our overall results in the second quarter, which exceeded our expectations and reflects strong momentum across our business. We are particularly pleased with our record new bookings and strong revenue growth, which demonstrates our leading position in the market as a trusted partner to deliver value for our clients. Based on the strength of our second quarter results and confidence in the second half of the fiscal year, we are increasing all elements of our full-year outlook, which I will cover in more detail later in our call. Let me begin by summarizing a few of the highlights for the quarter. Revenues grew 5.4% in local currency and continue to include a reduction of approximately 2 percentage points from a decline in revenues from reimbursable travel costs. Q2 revenues were nearly $140 million above our guided range driven by broad-based over-delivery across all dimensions: markets, services, and industries, as our business built back even faster than anticipated. We also continued to extend our leadership position, with growth significantly above the market. We saw broad improvement in industry trends. Approximately 50% of our revenues came from 7 industries that were less impacted by the pandemic, which in aggregate accelerated this quarter to low double-digit growth. At the same time, we saw continued improvement from clients in highly impacted industries, which collectively represent over 20% of our revenues and declined mid-single digits. Operating margin was 13.7%, an increase of 30 basis points for the quarter and 40 basis points year-to-date, reflecting strong underlying profitability as we continued to invest in our business and our people, including the one-time bonus we just announced. We continued to benefit from lower spend on travel, meetings and events, and we delivered very strong EPS of $2.03, up 10% over fiscal 2020, after adjusting both years for gains on an investment. Finally, we generated significant free cash flow of $2.4 billion in the quarter and $4 billion year-to-date. We continue to execute on our strategic capital allocation objective, returning roughly $3.1 billion to shareholders via dividends and share repurchases year-to-date. We have made investments of $1.1 billion in acquisitions, primarily attributed to 19 transactions in the first half of the year, and we expect to invest at least $2 billion in acquisitions this fiscal year. Let me turn to some of the details starting with new bookings. New bookings were a record at $16 billion, representing a 13% growth in U.S. dollars over the previous record in Q2 of last year. Consulting bookings were $8 billion, a record high, with a book-to-bill of 1.2. Outsourcing bookings were also a record at $8 billion, with a book-to-bill of 1.4. Our bookings were driven by both technology services and operations. We were pleased with the strength of our bookings in strategy and consulting, with a book-to-bill of 1.2. Turning to revenues, revenues for the quarter were $12.1 billion, an 8% increase in U.S. dollars and 5.4% in local currency, including a reduction of approximately 2% from a decline in revenues from reimbursable travel costs. We expect to return at least $5.8 billion, an increase of $500 million through dividends and share repurchases, as we remain committed to returning a substantial portion of cash to our shareholders.

Thank you, KC. Let me start with the environment. We continued to see compressed transformation, where companies have to simultaneously transform multiple parts of their enterprise and reskill their people in what previously would have been sequential programs. They are doing so to replatform their businesses in the cloud, address cost pressures, build resilience and security, adjust their operations and customer experiences, and find new sources of growth. COVID has hit a giant fast forward button to the future and we believe the demand to innovate at unprecedented speed and scale with rapid adoption of cloud, AI and other disruptive technologies is accelerating. For digital leaders, we see them no longer strictly competing for market share but to build their vision of the future faster than the competition. And for digital laggards, they are determined to not simply catch up, but to leapfrog. While COVID has accelerated the demand, the reality is that the extent of transformation ahead is enormous. The move from approximately 20% to 80% in the cloud alone is a huge undertaking and it is just the start, as companies will continue to invest to grow and innovate on their new cloud foundations. In Q2, our engines of growth across Accenture have lowered to the life to meet these needs of our clients and we see strong momentum going into Q3. I will share some examples. We called the once in a digital era replatforming of businesses into the cloud when we created Accenture Cloud First to bring industry cloud and state-of-the-art change management and transformation together. We saw this quarter’s strong double-digit growth in cloud overall as well as the subset of Accenture Cloud First, which growth was even higher. Intelligent platform services, which is essential to building the digital core of our clients, is back to high single-digit growth as companies resume this critical aspect of their transformation. Applied intelligence, with our data and AI solutions and security, both sizable, but still in the early stages of the scale we expect long-term, both had strong double-digit growth in Q2. Operations grew double-digits as companies sought to digitize their enterprises, leveraging our deep industry and functional expertise in our AI-driven SynOps platform. Interactive improved and grew high single-digits as companies continue to shift to digital channels and need cost efficiencies around sales and marketing to invest in new capabilities and seek more data-driven marketing campaigns. Industry X helped diversify our sources of revenue in the enterprise and grew strong double-digits, driven by the need for product and engineers to accelerate the time to market of smarter and more sustainable products and enhance the efficiency and flexibility of manufacturing facilities and the ability to interconnect machines and operate remotely. We are distinctive because no other competitor has our scale and breadth of services, which allows us to seamlessly serve the different dimensions of compressed transformations. We also are able to give our clients speed and cost levers through our managed services to digitize using our assets and platforms and address cost pressures. Furthermore, our distinctive capabilities in industry innovation and investment are clear differentiators. Our strong strategy and consulting practitioners bring deep industry expertise to all functions of the enterprise and help bring together our services to deliver to our clients, often informed by cross-industry insights, such as for payments and omni-channel engagement. Our ability and commitment to consistently invest in acquisitions, R&D, and our people is unmatched in our industry. Our strategic decision to preserve our talent last year, including our recruiters, provided a strong base to meet the surge in demand we have experienced. We increased hiring approximately 50% both year-over-year and since last quarter. Our Industry X team is helping Formula One re-launch its F1 TV Grand Prix racing product. By using the cloud-based Accenture video solution, live streams from 20 trackside and onboard cameras and a growing range of connected devices, we are continuously innovating to embed intelligence in their platforms to deliver the best possible viewer experience.

Thanks, Julie. Let me now turn to our business outlook. For the third quarter of fiscal 2021, we expect revenues to be in the range of $12.55 billion to $12.95 billion. This assumes the impact of FX will be about positive 4.5% compared to the third quarter of fiscal 2020 and reflects an estimated 10% to 13% growth in local currency. For the full fiscal year 2021, we continue to expect the impact of FX on our results in U.S. dollars will be approximately positive 3% compared to fiscal 2020. For the full fiscal year 2021, we now expect our revenue to be in the range of 6.5% to 8.5% growth in local currency over fiscal 2020, including approximately negative 1% from a decline in revenues from reimbursable travel. For operating margin, we now expect fiscal year 2021 to be 15% to 15.1%, a 30 to 40 basis point expansion of our fiscal 2020 results. We continue to expect our annual adjusted effective tax rate to be in the range of 23% to 25%. This compares to an adjusted effective tax rate of 23.9% in fiscal 2020. For earnings per share, we now expect full year diluted EPS for fiscal 2021 to be in the range of $8.67 to $8.85. We now expect adjusted full year diluted EPS to be in the range of $8.32 to $8.50 or 12% to 14% growth over adjusted fiscal 2020 results. Our free cash flow guidance continues to reflect a very strong free cash flow to adjusted net income ratio of 1.3 to 1.4. Finally, we now expect to return at least $5.8 billion, an increase of $500 million through dividends and share repurchases 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. Angie?

Thanks, KC. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the questions. Operator, would you provide instructions for those on the call?

Hey, thanks. Terrific results here. I can’t remember. I was thinking the last time you guys raised your margin outlook, especially against such strong bookings and investments like cloud first, you talked about plus this one-time bonus to employees, etcetera? So what’s different this time to allow you to do that to raise margins modestly against some good momentum here? And I will ask my follow-up just together with this, which is given the big bookings, thinking about contract execution, do you feel good about sort of the level of expectations you need to deliver here to keep this momentum going?

Okay. Thanks, Tien-tsin. So in terms of operating margins, let me just cover with you what’s the driver this year of our 30 to 40 basis points operating margin expansion. It is unusual for us to expand our operating margin halfway through the year. And so implied in our guidance for the year, there is continued healthy margin expansion in the back half, which includes the 40 basis points we have already done year-to-date. I’ll highlight a few things for the expansion this year, looking at strong revenue growth alongside increased contract profitability. We do have increased contract profitability coming through in our gross margin in the first half of the year. Utilization has also contributed to margin expansion this year based on higher utilization rates. We are getting some additional margin expansion this year, and the other factor is due to the lower travel expenses. We'll benefit from that overall for the full year, primarily in the first half.

Yes. And Tien-tsin, I will take the question about execution. We are very confident about our ability to execute. One of the things that’s really benefiting us is just our excellent performance when the pandemic started and we had to move all of our people from our centers while our clients were having to move remotely. We maintained our ability to operate and execute for our clients during this unprecedented time without missing a beat. We feel very good about our delivery capabilities globally.

Yes, thanks both.

Hey, good morning. Nice results here. Julie, I wanted to rewind the clock back to early 2020, when you reorganized Accenture to pivot toward more focus on the geographies and geographic expansion. Now that we’re a year plus in, can you reflect on what’s working well with that pivot, what’s working maybe less well, or has been more challenging than you expected, and what’s different about operating in growth markets?

Sure. Great question. One of the things that we look back on internally as a leadership team was that we were bold in our ambition to put that new model in place only 6 months into the fiscal year and it showed us that speed matters. We made the right strategic move by putting our leaders closer to clients while enhancing the ability to move innovation around the world. We simplified our approach, and importantly, we believe the ability to connect our services was critical for delivering outcomes as we serve our clients well.

Terrific. Thanks. Maybe my quick follow-up is maybe for KC, a follow-up on Tien-tsin’s question. I know you said you’re running a little hot on utilization right now. I’m curious though, with the shift to remote work, do you think that shift is going to remain more permanent? And will it allow you to maintain a higher level of utilization on a more permanent basis?

Yes. Thanks, Lisa, for the question. We are working to bring utilization back into a more normal range, but we’ve seen an increase due to the accelerated demand. We don’t see a structural change in utilization going forward, although we do expect levels to normalize again with a holistic view of employee experience and collaboration.

Yes, and just to remember, Lisa, like we have a very important value proposition that includes being able to do continuous learning, and the right amount of time for strategic thinking, and to come together around important initiatives. So we believe that, over time, we should get back to a more normal state regardless of where people are working from.

Thank you. Congratulations on these tremendous results. I hate to keep bringing up margin again and again but one thing I did not hear you explicitly call out was pricing, which you might expect given the pivot. Do you see any pricing pressure in the market? And as demand accelerates across the industry, do you expect attrition to return to historical levels?

Yes. Thanks, Ashwin. The business environment does remain competitive and in some areas, we experienced pricing pressure, but we are seeing signs of stability. We always strive for smart commercial arrangements that benefit both our clients and Accenture. Within our operating margin, we see expanded delivery of profitability, and that’s a key part of our margin expansion for this year.

Yes, Ashwin. We expect attrition might return to industry norms, although we will strive to keep it lower. Our ability to care for our people during challenging times has indeed helped us retain talent. Nevertheless, we are keen on ensuring we can grow and recruit at elevated levels moving forward.

Just thinking about this more structurally longer term, is this growth rate sustainable? How has the pandemic changed things to potentially allow for a more sustainable growth trajectory?

Instead of looking ahead to next year, let's focus on our current business. We have strengthened our core around digital cloud and security, which has driven all our engines of growth. We continue to invest in capabilities that allow us to meet demand. We are at a tipping point with the acceleration of digitization, and our growth strategy will keep these engines strong.

I'll just add that we continue to focus on our acquisitions and investing in our growth areas, like cloud. We are building a diversified portfolio which will sustain our business for years to come, regardless of market fluctuations.

Outsourcing growth was the strongest in six years, and I’m wondering if there’s something within outsourcing that has changed leading to such growth. Can you share insights into what’s triggering this growth?

That’s a great question. The growth in outsourcing is driven by compressed transformation where companies need to digitize, source talent, and improve every aspect of their operations. We leverage our SynOps platform and deep expertise in operations and technology to deliver sophisticated outcomes that our clients are pursuing. This integrated approach is unique and continues to be vital for our clients’ success.

Yes, to add to that, we see double-digit growth in outsourcing continuing as we progress through the year. Resources might be impacted but the mix will remain healthy toward growth.

Can you provide some color on how we should think about the contribution from B&A, the areas of focus, and sustainability regarding this initiative?

Our ability to invest significantly in B&A is a competitive advantage. Historically, we allocate about 20% of our cash flow towards B&A, and this year we expect even more. Successful integration is key, and we anticipate a greater contribution within operating results as we continue our investments strategically.

Moreover, our strong ecosystem partners play a crucial role in enabling us to deliver integrated offerings. Relationships with partners drive our growth and are key to bringing innovation to our clients.

Operator, we have time for one more question and then Julie will wrap up the call.

Have you seen a pickup in captive acquisition opportunities over the last several quarters? Any insights on how that part of your business might be contributing to your outperformance?

We’ve noted an increase in interest in captives, and while we are executing on some, it's still too early to assess how significant they might be in the mix long-term. Our digitization capabilities remain integral to our offerings. KC, anything to add?

We expect to see double-digit growth in outsourcing and a healthy mix overall. Resources are improving, but it is important we monitor the trends closely.

Thank you again for joining today, and a big thank you to all of our incredible people around the globe. I’d also like to extend my gratitude to our shareholders for your continued trust in us. May everyone stay well and healthy.