Accenture plc (NYSE: ACN) sold off by 7% on 9/24/20 in a mixed market after the company delivered sales and profits that lagged expectations for fiscal 4Q20. Weakness in the stock was primarily related to cautious guidance for the first quarter of FY21 and most likely the first half.
Accenture’s 4Q20 results were consistent with its midpoint guidance; investors had become accustomed to the company beating expectations. Revenue declined 1% in local currency and 2% in GAAP.
Several of Accenture’s vertical end markets continue to struggle, most notably travel, retail, and portions of industrial. Together, industries hard-hit by the pandemic represent about 20% of revenue. Other parts of the business, including healthcare, have grown during the pandemic.
In our view, Accenture’s strengths remain intact. The company in 4Q20 recorded its second-highest ever new bookings; the all-time best quarter for bookings also occurred during fiscal 2020. Despite the pandemic, Accenture improved profitability in two out of three regional markets, with Europe mainly weighing on results.
Accenture provided guidance that signals challenges stretching across the first half of fiscal 2021, and expects a solid rebound in a more normalized market environment in 2H21.
The shares rose 18% in 2015, 9% in 2014, and 24% in 2013.
For fiscal 4Q20 (ended August 31, 2020), Accenture reported revenue of $10.84 billion.
In Accenture’s consulting business, part of the contract pricing included in revenue represents travel and housing costs for Accenture consultants. With Accenture’s team largely constrained from traveling during the fiscal third quarter, reimbursable travel costs were not included in revenue; that reduced revenue by approximately 200 basis points. These reimbursable travel revenues are exactly matched by reimbursable costs, so the net effect on margins was negligible to slightly positive.
While revenue and adjusted EPS slightly lagged Street expectations, the primary cause of the stock selloff was management’s light guidance for the current quarter and indications that fiscal 2Q21 would be similarly soft. Despite an anticipated 2H21 bounce-back, the start to the year will be sufficiently weak for Accenture to miss full-year Street expectations.
For all of FY21, management guided for revenue growth in local currency of 2%-5%; the pre-reporting consensus had called for 5% annual growth. Accenture anticipates that a lower level or reimbursable travel costs will represent a further 1% headwind to FY21 top-line growth. The company’s EPS guidance for fiscal 2021 of $7.80-$8.10 also lagged the pre-reporting consensus of $8.17.
CEO Julie Sweet noted that fiscal 2020 results ‘demonstrate(ed) the relevance of our growth strategy,’ as well as the resilience of the company’s business and people in the face of the unanticipated pandemic. Accenture in 2020 also displayed operational rigor and discipline while demonstrating the power of the company’s relationships with the world’s leading companies, according to the CEO. In a rapidly shifting environment, Accenture displayed its ability to ‘pivot rapidly’ to meet the needs of clients in an unsettled operating environment.
The New (digital, cloud, security) represented more than 70% of revenue exiting 4Q20, a highest-ever percentage for the company. The pandemic, like the trade war immediately before it, has strained clients’ supply chains, and clients have responded by turning to Accenture for digital solutions. The New has become so much a part of Accenture’s core that the company will not break out this metric in fiscal 2021.
The CEO noted that the company ‘committed to higher bookings in 4Q,’ and Accenture posted its second-strongest bookings quarter ever. For 4Q20, a seasonally strong quarter for new business, total bookings were $13.98 billion, up 8% year-over-year and up 27% sequentially. The all-time record quarter for bookings was 2Q20, just slightly higher at $14.20 billion. Growth in 4Q20 bookings continues to be dominated by demand for digital, cloud, and security.
Given total revenue of $10.84 billion, total book-to-bill was 1.29 in 4Q20, compared with 1.00 in 3Q20.
Consulting bookings of $6.46 billion were up about 7% year-over-year. Consulting revenue was $5.68 billion. The absence of reimbursable travel expenses subtracted three percentage points of revenue growth, contributing to the revenue decline in consulting, while being immaterial in outsourcing. The consulting book-to-bill ratio was 1.14, just above Accenture’s target range of 1.0-1.1.
Consulting contracts have historically been shorter in length and more economically sensitive than the outsourcing business. Consulting engagements in the digital age are expected to become more complex, lengthy and more self-renewing in nature; that process is developing at an uneven pace. Clients are increasingly booking new consulting contracts in phases. This creates shorter-duration bookings, but also contributes to steadier growth.
Outsourcing bookings totaled $7.52 billion in 4Q20, up 10% year-over-year and up 55% from sequentially adjacent 2Q20. Outsourcing bookings are inherently lumpy, given that most contracts are multi-year in nature. The outsourcing book-to-bill ratio surged to 1.46 for 4Q20, topping the prior record of 1.42 for 2Q20; outsourcing book-to-bill was 1.40 a year earlier.
Accenture ended FY20 with 216 ‘Diamond’ clients, representing their largest client relationships. That is a net increase of 15 clients who accounted for more than $100 million in new. Also during FY20, Accenture invested $1.5 billion in acquisitions. On the ESG front, the Accenture work force ended the year at 45% female, on the way to the 2025 goal of 50-50 gender balance.
In terms of what the company calls service dimensions, Operations grew in high-single digits year-over-year, while technology services grew in mid-single digits. Strategy and consulting services declined in low teen percentages, however. These service dimensions played out uniformly across all three regional markets.
Accenture has now shifted its managerial focus from its operating groups (industry groups, or end-markets) to its regions. Along with revenue for both regions and operating groups, the company has begun disclosing operating income for regions and ceased disclosing operating income for operating groups.
Europe (32% of revenue) was down 5% in GAAP and in local currency. Strength in Italy and Germany was offset by ongoing weakness in U.K. Growth markets (21% of total) were up 3% in local currency, led by Brazil and Japan.
In an encouraging sign, the North American operating margin expanded to 17.1% in 4Q20 from 13.8% in 3Q20. The Growth Market margin expanded to 15.0% year-over-year from 13.9% in 4Q19, but tightened from 21.5% in 3Q20.
As for the company’s operating groups, H&PS was an outlier with 11% GAAP revenue growth. That reflects growth both in healthcare and public service (government). Every other operating group had lower year-over-year revenue in 4Q20, with Resources down 11% and Products down 6% in GAAP.
As it does at the end of its fiscal year, Accenture provided revenue guidance for the current fiscal year of FY21. Guidance implies negative top-line comparisons across the first half of fiscal 2021, followed by recovering demand in the second half as the global economy establishes a post-pandemic new normal.
Amid unprecedented turbulence in markets and stocks, Accenture appears to have the financial resources, customer presence, and market strength to ride out the storm. From a valuation perspective, Accenture appears attractive based on our discounted free cash flow model and blended valuation analysis.
EARNINGS & GROWTH ANALYSIS
Which was down 2% year-over-year on a reported basis and 1% in local currency. Revenue was in line with the $10.80 billion midpoint of management’s $10.60-$11.00 billion guidance range, but missed the $10.93 billion consensus call.
Accenture earned $1.99 per diluted share in 4Q20, which was up 14% year-over-year; GAAP results included a one-time gain of $0.29. Non-GAAP EPS of $1.70 declined 2% and missed the consensus estimate by $0.03.