Accenture : Fourth Quarter Fiscal 2023 Earnings Conference Call Transcript

Accenture

Fourth Quarter Fiscal 2023

Financial Results

Conference Call Transcript

Thursday, September 28, 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 fourth quarter and full 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 both the fourth quarter and full fiscal year. Julie will then provide a brief update on our market positioning before KC provides our business outlook for the first quarter and full fiscal year 2024. We will then take your questions before Julie provides a wrap 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 reconciliation 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 everyone joining us. And thank you to the approximately 733,000 Accenture people who have worked hard to be at the center of our clients' business across our fiscal year '23.

Our laser focus on creating 360-degree value for our clients and all our stakeholders is reflected in our overall strong results for the year. With record bookings of $72 billion, we had a record 106 clients with quarterly bookings greater than $100 million in FY '23, up from 100 last year. We now have 300 Diamond clients, our largest client relationships, an increase of 33 from last year, demonstrating yet

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again the depth and breadth of our capabilities and the trust our clients have in us. We delivered revenues of $64 billion for the year, representing 8% growth in local currency, while continuing to take market share. We expanded adjusted operating margin by 20 basis points and delivered adjusted EPS growth of 9% while continuing to significantly invest in our business and our people, with capital deployed of over $2.5 billion across 25 acquisitions; $1.3 billion in R&D, assets, platforms and industry solutions; and $1.1 billion invested in the training and development of our people. And we generated free cash flow of $9 billion, allowing us to return over $7 billion of cash to shareholders. And we are delivering a little ahead of schedule on our business optimization actions we announced in March to reduce structural costs to create greater resilience.

We also continued to attract, retain and inspire outstanding people through our talent strategy. We're making progress toward our commitment to net zero by 2025, and we invested in our communities to help ensure we have vibrant places where we work and live. I will give more detail a little later in the call.

Taking a step back. Coming off 2 fiscal years of double-digit growth and a truly extraordinary FY '22, we are very pleased with our FY '23 results and the moves we have made to optimize our business. We are also rapidly taking an early leadership position in gen AI, which will be an important part of the reinvention of our clients in the next decade. Last quarter, we shared that we had sold 100 projects with roughly $100 million in sales over the prior 4 months. Demand accelerated in Q4 with another approximately $200 million in gen AI sales, to bring our total to over $300 million for the year. We also are embracing the use of gen AI in our own delivery of services and the way we work across Accenture.

As we reflect on how our market has developed over the last year, we and our clients have had to navigate a macro environment that is tougher than we anticipated at the beginning of FY '23. While it's played out differently across markets and industries, we have seen greater caution globally with lower discretionary spend; slower decision-making; and in particular for us, a significant impact from the challenges the comms, media and tech industries have faced. For example, in Q4, where we grew 4% in local currency, if we exclude CMT, we grew 7% globally, 6% in North America, 9% in Europe and 8% in Growth Markets. Against that backdrop, as we enter FY '24, we remain laser-focused on creating value for our clients. While the pace of spending has changed, the fundamentals have not. All strategies continue to lead to technology; and companies will need to reinvent every part of their enterprise using tech, data and AI to optimize operations and accelerate growth. To do so, they must build a digital core. We are continuing to see significant demand in areas like cloud migration and modernization, modern ERP and data and AI and the emergence of gen AI in particular, all of which represent areas of great opportunity. And it's still early.

For example, we estimate that:

• Only 40% of workloads are in the cloud today.

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• Only 1/3 of clients have modernized their ERP platforms and
• less than 10% have what we define as mature data and AI capabilities.

We believe helping build a strong digital core and then using it to reinvent will be the drivers of our growth. Our ability to advise, shape and deliver value-led transformation leveraging the breadth of our services and industry expertise, from strategy and consulting to technology, to our managed services across industries and geographic markets, along with our privileged position with our ecosystem partners, is what makes Accenture unique. And you can see this unique positioning in the number of our Diamond clients and clients who turn to us for large-scale transformation.

Over to you, KC.

KC McClure

Thank you, Julie. And thanks to all of you for joining us on today's call.

We were pleased with our results in the fourth quarter, which were within our guided range and aligned to our expectations, completing another strong year for Accenture. Our results reflect the diversity of our business and once again illustrate our ability to run our business with discipline and deliver significant value for our shareholders.

So let me begin by summarizing a few highlights for the quarter. Revenues grew 4% local currency, driven by high single or double-digit growth in 5 of our 13 industries. As we called out last quarter, we expected increased pressure in our CMT industry group; and we saw declines of 12% local currency this quarter. As Julie mentioned, excluding CMT, our business grew 7% globally.

We delivered adjusted EPS in the quarter of $2.71, reflecting 4% growth over EPS last year. Adjusted operating margin was 14.9%, an increase of 20 basis points over Q4 last year, and includes significant -- continued significant investments in our people in our business. And finally, we delivered free cash flow of $3.2 billion, driven by very strong DSO management.

Now let me turn to some of the details. New bookings were $16.6 billion for the quarter, a 10% decline in local currency with an overall book-to-bill of 1. Consulting bookings were $8.5 billion with a book-to-bill of 1. Managed services bookings were $8.2 billion with a book-to-bill of 1.

Turning now to revenues. Revenues for the quarter were $16 billion, a 4% increase in both U.S. dollar and local currency representing continued market share gains. Now as a reminder, we assess market growth against our investable basket, which is roughly 2,000 of our closest global public company competitors, which represent

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about 1/3 of our addressable market. We use 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 on a rolling 4- quarter basis.

Consulting revenues for the quarter were $8.2 billion, a decline of 2% in both U.S. dollar and local currency.

Managed services revenues were $7.8 billion, up 10% in both U.S. dollars and local currency.

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

Turning to our geographic markets. In North America, revenue growth was 1% in local currency, driven by growth in public service, health and utilities. These increases were partially offset by declines in communications and media, software and platforms, banking, capital markets and high tech. In Europe, revenues grew 7% in local currency, led by growth in banking and capital markets, industrial and public service. Revenue growth was driven by Germany and France. In Growth Markets, we delivered 6% revenue growth in local currency driven by growth in chemicals and natural resources, industrial and energy. Revenue growth was driven by Japan.

Moving down the income statement.

Gross margin for the quarter was 32.4% compared with 32.1% for the same period last year. Sales and marketing expense for the quarter was 10.8% compared with 10.2% for the fourth quarter last year. General and administrative expense was 6.7% compared to 7.1% for the same quarter last year.

Before I continue, I want to note that in Q4 we recorded $472 million in costs associated with our business optimization actions, which decreased operating margin by 290 basis points and EPS by $0.56 and also impacted our tax rate. The following comparisons exclude these impacts and reflect adjusted results.

Adjusted operating income was $2.4 billion in the fourth quarter, reflecting a 14.9% adjusted operating margin and an increase of 20 basis points from operating margin in Q4 last year. Our adjusted effective tax rate for the quarter was 27.4% compared with an effective tax rate of 24.6% for the fourth quarter last year. Adjusted diluted earnings per share were $2.71 compared with EPS of $2.60 in the fourth quarter last year.

Days service outstanding were 42 days compared to 42 days last quarter and 43 days in the fourth quarter of last year. Free cash flow for the quarter was $3.2

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