Key Takeaways:
1. They missed estimates and issued weak guidance. Revenue however was at the midpoint of their guided range and took a 2pt hit from lower travel re-imbursement headwinds. Full year EPS ahead of guided range.
2. While headwinds in some end markets persist, digital transformation imperative is long-term secular growth driver to their business.
3. Strong bookings and they continue to take significant market share, signifying solid business fundamentals. They grew 4x the market in the last 2 quarters.
4. CEO Julie Sweet said…”Post Covid leadership requires that every business become a cloud first business quickly moving from today’s approximately 20% in the cloud to 80%. This is a once-in the digital era massive re-platforming of Global business.”
Current Price: $216 Price Target: $267
Position size: 4% Performance since inception (3/11): +31%
Additional highlights:
· While headwinds in some end markets persist, digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future, despite “this incredibly difficult challenging macro environment.” Accenture’s unique positioning of trusted partner w/ leading edge technology expertise combined with deep industry expertise is key to this.
· Industry end market performance – headwinds in some industries persist:
o Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, grew high-single-digits with continued double-digit growth in software platforms, Life Sciences & Public Service.
o >20% of revenue from clients in highly impacted industries which continue to be pressured – this includes travel, retail, energy, aerospace & defense and industrials. Last quarter they called out banking/capital markets as a weak area, but this quarter they did not. While performance varies by group collectively declined mid-teens. This is an acceleration from last quarter when this group declined high-single-digits.
o This underscores the benefit of diversified industry end markets.
· Delivered full year revenues within guided range and EPS above guided range. For the full fiscal year adjusted earnings per share were $7.46, $0.03 above their adjusted guided range for the year.
· Consulting revenues were $5.7B, down 8% in local currency, which includes a 3pt headwind from lower travel reimbursement.
· Outsourcing revenues were $5.2B, up 7% in local currency.
· Continued mix shift to “the new” – now 70% of revenue. Digital, cloud and security grew low single digits.
· Geographic breakdown: strongest markets were Japan (double digit growth) and Brazil (high single digit growth). Europe was down 5% (Italy strong, UK weak), North America was flat.
· Large client tailwind – Ended FY20 with 216 Diamond clients (represents their largest client relationships) – an increase of 15 clients from 2019. Diamond clients account for more the 50% of revs.
· In Q4, they had 17 clients w/ new bookings of over $100m. For example, Accenture and Microsoft entered into a five-year strategic agreement with Halliburton to advance their digital capabilities, complete its move to cloud-based digital platforms and migrate all of its physical data centers to Azure.
· Strong bookings of $14 billion, up 9% YoY with a book-to-bill of 1.3. Consulting book-to-bill of 1.1 and outsourcing book-to-bill of 1.5. Bookings dominated by high demand for digital cloud and security-related services, which they estimate represented ~70% of new bookings in the quarter.
· Capital allocation: continuing all elements of their capital allocation program – they continues to return cash to shareholders through cash dividends and share repurchases. In fiscal 2020, they returned $5B to shareholders, including $2B in dividends and $3B in share repurchases.
· They are now 45% women; on track for their 2025 goal of a 50-50 gender balance
· Guidance:
o For FY 21, they expect revenue to be in the range of 2% to 5% growth. This includes a 1pt hit from lower travel.
o Expect diluted EPS in the range of $7.80 to $8.10 or +5% to +9%
o FY21 FCF to be in the range of $5.7B to $6.2B
o “We view fiscal year 21 as turning a page. We are no longer navigating a crisis we are facing a new reality and we plan on returning to pre-covid growth rates by the second half of this fiscal year.”
· Valuation:
o The stock is undervalued trading at a ~4.5% forward yield. They have an easily covered 1.6% dividend and no net debt.
o Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
o They have $8.4B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$ACN.US
[tag ACN]
[category equity research]