Accenture plc

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Accenture is a leading global professional services company that helps the world’s leading businesses, governments, and other organizations build their digital core, optimize their operations, accelerate revenue growth and enhance citizen services by combining its strengths in strategy & consulting, technology, operations, industry X, and Song.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Accenture’s revenue distribution is diverse, reflecting its wide range of services and geographic reach. It operates in four geographic markets: North America (40% of revenues in fiscal 2024), Europe (38%), Growth Markets (which includes Asia Pacific, Latin America, Africa, and the Middle East) (22%), and is involved in 13 different industry groups. No individual market or client is materially significant. This diversification mitigates risks associated with over-reliance on a single market or client. Revenues are earned from:

  • Strategy & Consulting (31% of revenue)
    • Delivers high-level advice and solutions to help clients with organizational strategy, digital transformation, innovation, and M&A advisory.
  • Technology (31% of revenue)
    • Provides services related to systems integration, application development, data and analytics, and other emerging technology implementation.
  • Operations (22% of revenue)
    • Offers services related to business process outsourcing and managed services, providing ongoing support for clients’ day-to-day business functions.
  • Industry X & Song (16% of revenue)
    • Focused on engineering & manufacturing, media & entertainment, and the creative end of the business to improve their customer experiences.

The company is managing a strategic shift towards “Industry X,” which focuses on enabling clients to better monetize their product and service portfolios through technologies.

The professional services industry is highly competitive. Accenture competes with other large consulting firms, technology companies, and niche service providers. Key areas of competition include:

  • Cost: while Accenture commands high revenue per employee, its labor costs are very high, so that cost structure advantage is something they do not possess.
  • Talent: In the field of services, hiring and retaining high quality talent is extremely important.
  • Technology: Since the industry relies on technology, companies can have difficulty maintaining their moat due to continuous technological disruption.
  • Brand: Accenture has a great brand in the market, as a company who delivers value. But there are many players in this market.

Accenture is addressing the competitive landscape by constantly innovating in their strategies to stay on the forefront of their industry, improving operating margins through business optimizations, using AI to provide better solutions to their clients, having a diversified business through their different business units, and by ensuring a high degree of client loyalty by helping their clients solve their problems in a satisfactory manner. However, these actions are still not guarantees that will lead to a sustained, long term moat due to intense competition in the market, which is why I am giving them a 3.

Accenture has demonstrated consistent growth in revenues and profits over the last few years, although like all other companies their margins have been under pressure from higher interest rates and a weakening economy. The company’s emphasis on digital transformation has contributed to its growth.

  • Profitability: Accenture’s earnings and profitability have remained strong despite a fluctuating economic landscape. This means that the business model has proven to be resilient in different economic scenarios. The high amount of free cash flow also indicates they do not need any more additional capital to continue the growth trajectory.
  • Margins: Operating margin in FY24 was 13.6%, but they are working on further expanding their operating margins.
  • Growth: The company continues to grow, however, its growth is not as fast as other technology companies. Their growth strategy depends on constant innovation and by capitalizing on existing competitive advantages.
  • Capital Efficiency: Accenture requires a significant amount of investment in human capital, marketing and sales, but as seen with their profits, they are able to generate considerable amounts of revenue while employing the invested capital.

The company’s financial health is strong, although there are some points to consider. It has a good history of generating positive operating and free cash flows, has an adequate level of liquidity, and maintains a manageable debt level. However, their debt load has increased recently, which has resulted in an increase in the risk profile.

  • Leverage: The company’s current debt to equity ratio is not bad, and it has a history of meeting debt obligations.
  • Liquidity: Accenture has strong cash reserves. However, they do not invest the cash in high yielding and safe assets, and instead keeps it in highly liquid cash and cash equivalents, this also contributes to opportunity costs.
  • Solvency: Accenture has enough assets to cover its liabilities in both short and long term, and is a well-established and stable company with little risk of solvency issues.

Though I think the company has a strong balance sheet, and has taken steps to improve it as well, there has been a recent increase in debt, and they are choosing to keep assets in not so high yielding options. I will still say the company has good enough financial health and rate them at a 4 out of 5.

Understanding Accenture’s operations can be complex, because of the sheer scale of the company and their diverse business activities, as well as the continuous focus on technological innovation. It needs some effort to know how each of its different business lines is structured, and how it manages to coordinate such operations in over 120 countries. It’s also hard to see the impact of management on the overall operation. Given the multiple sources of revenues and business and service offerings, the company is very difficult for an average investor to understand.

The company is trying to make their operations more transparent. But at this current stage, I am going to give the understandability a 2/5.

Accenture’s recent quarterly earnings call for Fiscal Q1 2024 (ending November 30, 2023) and its 10Q for the same quarter have provided some insights into the recent performance and management outlook.

  • Revenue: The company announced that its revenues were at $17.1B for the first quarter, which is a 3.0% increase in USD, but a 5.0% increase in local currencies. New bookings were up 10% to $18.7B
  • Profitability: There were increases in operating margins, and their adjusted earnings were $3.27 per share. The company also announced a new multiyear transformation program that aims to further increase operational efficiencies, and is expected to result in cost savings.
  • Guidance: Management has slightly lowered full year revenue outlook for fiscal 2024 due to macroeconomic uncertainties, but continue to expect growth in the medium term. They have also reaffirmed their focus on growing their digital transformation efforts, especially in areas such as AI.
  • Workforce & Attrition: As of November 2023, the company had 799,000+ employees, and has an annualised voluntary attrition of 12%. This shows that the company is still experiencing relatively high levels of employee turnover, which may result in some disruptions in operations.

The biggest risk to Accenture, that is visible by reading their 10Q and earnings calls is that of macroeconomic uncertainty. They have lowered their guidance due to current market conditions. Other risks for the company include intense competition in the industry, the risk of rapid technological innovation changing their business rapidly, their dependency on their employees and the risk of them switching to competitor’s, government regulations, political instabilities, and large currency fluctuations. These risks pose an uncertainty to the business, however, based on the company’s historical performance they are quite resilient, and should not have a long term impact on their prospects if these risks become a reality.

Though Accenture possesses some defensive attributes, and they have shown a record of resilient and steady growth, I don’t feel that they have a very strong moat. They are in a competitive industry, and are impacted a lot by macro economic conditions, which is why I am giving the moat a 3 out of 5.