Accenture Earnings Call Nuggets: Outsourcing, Demand Outlook and Margins

On Thursday, Accenture PLC (NYSE:ACN) reported its second quarter earnings and discussed the following topics in its earnings conference call. Executives shares the following insights investors.

Outsourcing

Tien-Tsin Huang – JPMorgan: Great results, especially on the outsourcing side. I guess I will ask something on the outsourcing front. You mentioned, I guess, last quarter to us that you are not seeing a shift from consulting to outsourcing, and that outsourcing is not growing at the expense of consulting, is that still the case? I’m just trying to get a better sense of how long this interplay between the two might persist? You follow my question Pam and Pierre.

Pamela J. Craig – CFO: Yeah. I think, just you do the math, right. Outsourcing is marginally a little bit greater proportion of our business right now, and we see that particularly happening in Financial Services and communications, media, and technology. It’s been a trend and we expect it to continue to be a trend.

Tien-Tsin Huang – JPMorgan: I guess just on the outsourcing growth as my follow-up. Is it pretty broad-based or driven by certain large deals and how would you characterize the risk profile? I would ask on the outsourcing side versus maybe two, three years ago?

Pamela J. Craig – CFO: Well, it’s quite broad-based. We see strong outsourcing growth virtually around the world and pretty much across the operating groups. So, this is clearly very good growth. I think in terms of the risk profile, I’ll just comment a little bit on our capital committee. It is something that we take very, very serious in all these deals, I think it’s fair to say we’re getting better and better at it and I do not see an increase in the risk profile by outsourcing work.

Pierre Nanterme – CEO: Just to add a word on this. I mean definitely outsourcing is a very relevant response to the clients challenges in improving their operational efficiency and their overall performance and this is true across the batch for all our industries, that’s why you can see that kind of acceleration of the demand in outsourcing across the board.

Demand Outlook and Margins

Rod Bourgeois – Bernstein Research: Hey first question on demand and then I had a quick question on the margin front. On the demand front Pam, you mentioned in your guidance commentary that your outlook assumed moderation in consulting. Is that moderation in the year-over-year growth rate as comparisons get tougher or is that moderation in the actual demand environment in seeing some incremental softening there, can you clarify whether that’s a year-over-year growth rate commentary or a demand trend commentary in year-over-year growth rate commentary or demand trend commentary?

Pamela J. Craig – CFO: It’s a year-over-year growth rate commentary. We are expecting that the consulting year-over-year growth rate will be more in the mid single-digits range next quarter and so it is very much that. We continue to see very good demand as you can see in the bookings being over 4 billion and the demand environment continues to robust in most parts of the world.

Rod Bourgeois – Bernstein Research: On the margin front, I want to focus on the Financial Services vertical there and I guess there’s two parts to my question here. Are you seeing any meaningful pricing issues contributing to the margin decline in Financial Services, and did you have any write-off on troubled contracts during the quarter that caused the meaningful drop in the Financial Services margin?

Pamela J. Craig – CFO: I would say, Rod, that it is more due to the things that I mentioned a few minutes ago in the sense that we do have a couple of nice-sized acquisitions that came on line, and so we planned to have some impact from those. We also did have higher selling costs in Financial Services, and I think that’s in large part due to there is significant transformation going on in that industry as you know, and so some of that was planned, and we did have, lastly, some delivery inefficiencies which will probably go into the category, and we need to work on that a bit more; that also contributed. But the first two were more of a planned nature.

Rod Bourgeois – Bernstein Research: Does that mean looking forward that the margins should recover after you get past the acquisition cost, and then some upfront selling cost on some transformation ore?

Pamela J. Craig – CFO: We do expect that the Financial Services’ profitability will tick back up.

Pierre Nanterme – CEO: We’re jumping on this, Rod, because I’m historically Mr. FS, so I still have some personal stake on this. And indeed, as you know, and as we communicated; banking, insurance and health, are industries where we decided to invest because we see the potential on those industries. So, it’s not a surprise that you consider impact of our investments in some of those margins, and so far, we are very pleased with the results of those investments in the term of the acquisitions we made and we announced recently with Duck Creek and with Zenta to form Accenture Credit Services, and of course, the other data point is we are pleased to announce that this quarter in Q2 Financial Services bookings was $2.1 billion, the highest booking ever in the Financial Services history.

To contact the reporter on this story: Alex Capel at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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