Where Are We Now
Updated on: 11/1/2021
Accenture is the enabler of the world's digital transformation, cloud adoption, and innovation projects. We currently believe the business has competitive scale advantages and is the best-in-class IT consulting firm with a fair valuation going forward.
Accenture's services once again proved their durability and deep entrenchment in corporate budgets as new bookings reached $5.0 billion with growth across the five major industry groups served.
Accenture is continuing to expand their service offerings at a rapid pace with another 7 acquisitions in the quarter. In 2021, Accenture made 46 acquisitions and closed $4.2 billion worth of them.
Accenture is the most diversified player in the technology services space, providing services to 40 industries in regions worldwide.
Accenture has among the strongest relationships with some of the largest companies in the world found in the Forbes Global 2000 list. These relationships offer immense leverage to win contracts time and again.
Innovation is at the core of Accenture’s value proposition. It boasts a global network of innovation hubs and delivery centres at which new concepts, ideas, prototypes, and technologies are created, tested, and implemented in partnerships with leading companies in their space.
Financial strength is part of Accenture’s identity – it allows the firm to return substantial capital to shareholders, reinvest in operations, and conduct plenty mission-critical acquisitions (as it has been doing) to beef up its expertise and service offerings as paradigms shift at an accelerating pace.
The cloud and digital transformation trends are still in their infancy. These trends renewed double-digit top-line growth at Accenture and should uphold Accenture’s strong cash flows for the foreseeable future.
Accenture is a global technology services leader in the business of providing professional services to virtually any industry in existence. The company is not only a consulting firm, but also one that engages in strategy, technology, and operations services and enables interactive and digital capabilities.
At the broadest level, these services can be split between consulting and outsourcing engagements. The former involves ad hoc, advisory-type work while the latter serves organizations with longer-term, ongoing tasks under a contract.
At Accenture, revenues are split roughly equally between the two types of work with consulting services contributing slightly more than half. It is also among the largest professional services firms in the world, typically considered within the global top 10 depending on the resource referenced (many firms are private and do not share sales and profit figures to the public).
The core of Accenture’s raison d’être is to help clients build – modernize, transform, digitalize, and streamline their operations to do things more efficiently, serve customers better, recognize market trends faster, and frankly, stay relevant in an increasingly competitive global playing field. Companies are no longer only competing against the business across the street. They are competing against everyone and anyone.
Accenture can be thought of as the all-encompassing hub of know-how and expertise to organizations and governments around the world. These companies may embark on a large IT project, an operational overhaul, corporate restructuring, international expansion, technological upgrade, or enter a new product or service market. In each of these cases and more, clients contract Accenture consultants and strategists to make the transition smoother and less expensive than if the organization were to try the project on its own. In the process, the organization learns from the Accenture staff to maintain its operations once the engagement has been completed and the changes have been implemented. Where there is change, there is Accenture.
Accenture’s most valuable assets are its human capital (people) and intangible expertise (collective knowledge). As the communicator, deliverer, and facilitator of the newest organizational concepts and technology, Accenture needs to stay on top of its game when it comes to knowledge accumulation.
Consultants at Accenture feed off the company’s massive network of connected classrooms, online courses, learning boards, and access to the top experts and organizations in their respective fields to gain the knowledge they need to help clients succeed faster than non-Accenture clients.
Accenture currently divides its operations into three reportable segments based on geography:
Within these regions, Accenture serves five main industry groups with one tiny group of unclassified industries:
Communications, Media & Technology
Health & Public Service
Accenture Revenue by Geographic Segment (Q4 2021)
Source: Accenture Q4 2021 Investor Infographic
Accenture Revenue by Industry Group Served (Q4 2021)
Source: Accenture Q4 2021 Investor Infographic
There’s no question Accenture is a high-quality consulting and outsourcing behemoth. This becomes even more apparent as one scans the company’s financial statements from the top to bottom line, its balance sheet, and cash flows.
We believe historical top-line growth is perhaps the most important set of information an investor can obtain. Accenture has been growing revenues at a consistent high single-digit pace over the last decade with some acceleration in the recent past as digital projects ramp up and the world shifts into a new paradigm at an unprecedented speed.
Accenture Historical Revenues ($M) (Q4 2021)
When it comes to the bottom line, Accenture is remarkably profitable and has been growing net income at a pace faster than its revenues. Not only is the company strong with its client bookings and retention, but it also maintains discipline on the cost side to keep value in and inefficiencies out.
Accenture Historical Net Income ($M) (Q4 2021)
Accent on the Future
Accenture began its story as part of the now-defunct accounting firm, Arthur Andersen, in 1951. A partner of the firm’s Administrative Division at the time, Joseph Glickauf, created a computer prototype called the “Glickiac”. Glickauf convinced his fellow partners to invest in the idea and soon found himself installing the first computer system for commercial use at General Electric’s Appliance Park.
Glickauf then took over as head of the Administrative Services division in 1957 and led the design and installation of the BankAmericard, the earliest form of what we now know as Visa. Glickauf’s computer expertise and the division’s emerging computer consulting practices gained ground with another major development in 1967 – Base V, a popular operating system used for the System / 360 IBM computers, was developed by the division.
By 1969, the division had seen enough engagements to come up with its own set of practices and methodologies in systems development. This would be the foundation upon which the consulting practice was built on and it continued to gain ground. By 1980, the Administrative Services division was renamed “Management Information Consulting Division” given the rapid growth of the segment and its inherent focus on consulting.
Information Technology (“IT”) was not the only area the division consulted on – in the 1980s, it introduced just-in-time manufacturing concepts and created a Strategic Services practice in New York, Chicago, and San Francisco. The division continued to grow faster than Andersen’s traditional accounting and tax practices and was renamed once again as “Andersen Consulting” in 1988 and became a separate business unit a year after.
After this separation, a few issues started to arise. Andersen Consulting was paying Arthur Andersen a portion of profits even though Arthur Andersen established its own competing consulting practice. A lawsuit initiated by Andersen Consulting ensued and was ultimately won. As part of the arbitration agreement, Andersen Consulting broke all ties to Arthur Andersen and changed its name to “Accenture”.
Accenture is derived from the phrase, “accent on the future”, which perfectly encapsulates what Accenture is all about – through its history and even today. The company went public in 2001, issuing an initial public offering at $14.50 per share on the New York Stock Exchange.
Although the company was born in the United States, the company’s place of incorporation and headquarters location are in Ireland.
Accenture has been on a tear throughout its entire history. It continued to win big contracts, created strong ties with some of the largest global disruptors, and sought ways to help clients win. The efforts have paid off staggeringly.
The Relationship Advantage
Accenture’s main competitive advantage stems from the long-term relationships it has developed with the world’s largest and most influential companies, organizations, and governments. The company’s sales are primarily derived from the Forbes Global 2000 entities, and it has partnerships with 97 of its top 100 clients for over a decade.
The company has 400+ such partnerships of which over 200 are technology partners and almost 200 are channel partners. These partnerships help Accenture push the limits of its service capabilities, spanning fields like cloud, security, hardware, IT, and more. Its long list of partnerships includes incredibly large businesses like Google, Apple, AWS, Cisco, CrowdStrike, Oracle, Salesforce, Snowflake, Workday, and plenty more.
Accenture leverages these relationships to create a “network effect” from which both sides — Accenture and the partner — equally benefit. Accenture and any given partner have mutual, non-competitive interests. Partners seek to place their services and / or infrastructure within an organization while Accenture implements the same services or infrastructure on behalf of its clients. These interests mesh well together and allow for reciprocity between the two sides. These tight relationships give Accenture an edge over competitors, especially smaller ones.
Patent (Innovation) Protection
As a firm that introduces new ideas, concepts, and innovation to the marketplace, Accenture is mindful that its biggest “edge” comes directly from the aggregate knowledge and expertise developed within the company. To protect its edge, Accenture seeks legal protection of this intellectual property (“IP”) through a portfolio of almost 8,000 patents and pending patent applications worldwide.
By protecting its innovative solutions and IP, Accenture can rest assured that it will be exclusively delivering among the world’s best services to its clients with no worry of a competitor swooping in and offering the same services for a cheaper price. Patents do not protect IP forever, but they do give the firm enough time to flex its edge, win clients, and win repeat contracts with those clients.
When clients receive an exclusive service that ultimately drives value, as is the case with Accenture’s services, the result is premium pricing power that clients are willing to pay themselves. Strong innovation and patent protection are some of the reasons Accenture is referred to as a premium brand in the professional services world.
Accenture’s Delivery Network
It is great for Accenture to innovate in-house, but what is the value proposition of these efforts and how does Accenture ultimately deliver this value to clients?
Through its network of over 100 innovation hubs scattered across the globe, Accenture aims to be the first to identify a new or emerging market, technology, or industry trend. By being the first to a new concept, this directly translates to Accenture’s clients being among the first adopters of such ideas or methodologies.
Because Accenture does the work behind the scenes to ensure these new ways of doing business not only work but provide loads of value to the client by saving them money, making them more, or helping them accelerate important initiatives, clients place immense amounts of trust into Accenture to discover or create the next cutting-edge service or solution.
Accenture fosters this innovation through several avenues – Accenture Research, Accenture Ventures, Accenture Labs, Studios, Innovation Centers, and Delivery Centers.
Accenture Ventures partners with early-stage companies innovating in some of the most obscure emerging technologies the world has seen. Accenture gets to have an exclusive look into some of these new technologies and gets an “unfair” advantage over competitors by being able to start working these concepts and technologies into its engagements before its competitors even realize they exist.
Accenture Labs makes sure every new idea, technology, or concept is vetted before it hits the market. By researching and developing these projects with diligent care, Accenture can be confident it is delivering tons of value to its clients before any other competitor can.
Finally, Accenture’s global network of innovation hubs and Delivery Centres help put it all together. In the words of Accenture itself, these locations “help clients imagine, build and scale for the future”. With every major company being a stone’s throw away from an Advanced Technology or Intelligent Operations Center in major economic hubs, Accenture helps get each client the talent they need to build and implement ground-breaking solutions quickly and at scale while speaking the same language as the client and working within the same time zone. Every minute and ounce of effort counts when one is revolutionizing the world – Accenture’s vast network speaks for itself in this regard.
A company with such in-house research and development capabilities, vast delivery network, and a constant drive to stay on top of the hottest trends for its clients to ultimately reap the benefits by saving money, making more, or gaining prominence in their field is one that can command pricing power. That is precisely how we view Accenture – a premium brand with exceptional pricing power that is here to stay.
Accenture operates a capital-light business model that becomes more profitable as it scales. Cost of services and sales and marketing costs as a percentage of total sales have been trending modestly downwards over the past decade. The company has operating leverage, which means that a higher proportion of sales dollars trickle down to the bottom line over time.
Operating leverage is a good thing. Although it does not contribute to long-term growth to the extent that good, pure revenue growth does, it is encouraging to see that Accenture has been able to keep costs tamed while the sales soar. Productivity is high and the company has clearly been delivering on its contracts. Combine pricing power with exceptional cost control, and you get Accenture.
Accenture is thriving from a concept it has coined as “compressed transformation”, a trend that has been a significant driver of revenue growth and will continue to drive sales throughout the foreseeable future.
Slow and steady wins the race — or so they say. There is a sense of urgency amongst leading enterprises, and they are doing everything they can to maintain their edge and get ahead. According to Accenture research, many of these so-called leading enterprises — those growing revenues 5x faster than their lagging counterparts — are literally compressing a decade of digital transformation into 1-2 years.
More than ever before, companies that reject modernity and hang on tight to old styles of business risk being disrupted in a “Big Bang” fashion or gradually over time in a compressive manner. When margins are being compressed, the only way to get out is to compress transformation.
Although cloud and digital transformation are humongous megatrends that have reignited double-digit revenue growth rates led by Accenture’s Cloud, Interactive, Security, and Industry-X business lines, a broader urgency towards “reinventing” their business model is top of mind for over 90% of corporate executives.
This includes but is not particularly limited to technological transformation. Organizations are seeking new ways of doing things, being more agile and resilient, and redefining their image for the markets they seek to target tomorrow, not yesterday.
In 2021, Accenture identified five trends that it believes companies will need to address with the utmost urgency and diligence. We have added brief explanations for additional clarity:
Stack Strategically — Technology is now part of business strategy. The two are not separate.
Mirrored World — Creating “digital twins” (models, replicas) in the virtual world to win in the physical world.
I, Technologist — Democratizing technology down to the employee level.
Anywhere, Everywhere — “Work-from-anywhere” is the largest workforce shift we’ve seen in the last few decades.
From Me to We — Building “multiparty” systems to remain resilient when things turn south.
Companies have a lot of work to do. It is increasingly difficult to stay relevant as a company. In fact, the average lifespan of an S&P 500 company today is merely a fraction of what it was just half a century ago.
Multitudes of organizations are still in the early stages of cloud adoption (roughly 20%) and millions of others are ill-prepared for new paradigms already being built without knowing it.
Average Lifespan of a Company in the S&P 500
Source: Innosight, Accenture Compressive Disruption Presentation
We believe Accenture has an astronomically large runway as a firm in between global innovation and the companies reinventing themselves. As the implementer of unique solutions and services to firms that are eager to adopt new ways of doing things early, Accenture creates a positive feedback loop with the world’s strongest and best companies.
These companies are usually the ones that breed the innovation of tomorrow, for which Accenture will again be around for and will implement for its clients. Accenture will use its vast network of personnel, collective knowledge, research resources, studies, and innovation hubs to drive whatever each new technological or conceptual revolution will be.
Strong Bookings Growth
In theory, everything seems to be going right for Accenture. However, a megatrend means nothing if one cannot capitalize on it.
Fortunately for Accenture investors, new bookings have been grinding higher and have hit a new record yet again.
Accenture New Bookings ($B)
Source: Accenture Annual Reports — 2016 - 2021
We believe this alludes to Accenture’s strengths in a few ways:
Accenture’s top clients seek the company’s services on a non-exclusive basis, coming back after each project.
Accenture’s services and solutions are incredibly relevant to the future — companies, organizations, and governments want to book Accenture’s consulting and outsourcing services whether there is a horrifying, global, pandemic-induced recession destroying the economy or not.
Strong pricing power appears to be inherent in new bookings, year after year.
Corporate budgets appear to be flexible when it comes to Accenture’s services. As an investor, that is an encouraging sign. Accenture has been able to stay ahead of its competition to drive value for clients, leading to what seems to be a permanent operating expense for the world’s best and most innovative disruptors.
Work Hard, Play Hard
Accenture works hard to help clients succeed and in turn benefits from gushing cash flow the company can use to build its brand, return capital to shareholders, or both. “Both” is the strategy Accenture takes when it comes to capital allocation.
The company’s cash flows are so strong, it can fund large share repurchases (“Net SP” – share repurchases net of issuances), mergers and acquisitions (“M&A”), and dividends primarily using a single year’s free cash flow ("FCF").
These efforts have certainly paid off for shareholders, being incredibly accretive to free cash flow per share and growing this metric at a low double-digit rate over the past decade while revenues grew slightly slower.
Free Cash Flow per Diluted Share ($)
Accenture can manage growth of this magnitude without much leverage. For a company with a market capitalization figure above $200 billion, total debt (including leases) of about $3.5 billion is akin to nothing. What’s more is that Accenture is in a net cash position – total debt minus cash, cash equivalents, and short-term investments – that provides the company with ample firepower and flexibility to invest however it pleases.
It is obvious this is a bullish sign for investors excited for a modestly growing dividend and share buybacks. However, we would also like to highlight the importance of the financial strength and bulletproof balance sheet for the company’s expansion plans and future competitive state.
Accenture is a remarkably prolific acquirer. These acquisitions enable the company to expand its horizons by acquiring critical skills and capabilities in high-growing areas of the market that it may not otherwise have had. One could argue business acquisitions are discretionary; we believe they are necessary in this field to continue growing, developing, and getting a hold of the latest, obscure, high-upside innovation if a consulting and outsourcing firm wants to serve the world’s best disruptors.
Accenture Business Acquisitions ($M) (Q4 2021)
It’s worth repeating that Accenture has the firepower to make this happen and we would expect management to continue executing in this regard. The fact that the firm can do this without loading up on destructive debt levels is a huge bonus.
Reliance on Corporate Budgets
Although we believe that Accenture services are deeply entrenched in yearly corporate budget approvals of some of the highest quality and most resilient companies and organizations the world has to offer, there is still a degree of risk in this regard. The past is no guarantee for the future – bookings increased during the COVID-19 pandemic, but this does not preclude Accenture from the risk of organizations slashing discretionary IT, modernization, cloud, and other consulting and outsourcing engagement around times of economic hardship.
Accenture is acquiring companies at a pace that well-known serial acquirers perform. This naturally comes with execution risk from both a strategic and financial standpoint. Misidentifying solid opportunities could lead to strategic destruction and ultimately hurt the bottom line. The market for acquisition targets is also hot in a playing field with other massive players, like McKinsey, the Big 4 accounting firms, and other prominent professional services firms. Accenture runs the risk of overpaying for a company or a group of them and diluting the bottom line.
Pricing power is a strength at Accenture, but it could also attract tons of competition and open lots of pricing downside if emerging players snag customers. Although we believe these smaller players do not boast the same network effects and relationship benefits as Accenture, they could possibly win contracts for niche digital purposes. For example, firms like Cognizant and Infosys are large and focus on digital transformation and IT solutions if they perform well in the client market and win repeat business.
Accenture is an exceptional business that delivers value in every industry it serves. The firm’s impeccable qualities stem from the strong client relationships, relentless focus on learning and expansion, and vast global delivery network through which any major client around the world can be reached.
Compressed transformation is a powerful trend that management has identified as a large growth trend this decade. Forward-thinking organizations are faced with urgency in this regard and compressing technological and methodological change into 1-2 years rather than the ten years these changes would have taken in the past. Double-digit revenue growth has been reignited at Accenture and is poised to continue for as long as this trend persists, in our view.
Putting it all together is Accenture’s solid capital allocation strategy. The company has a capital-light business model that requires little to no maintenance expenditures. Cash is flush and the debt balance is extremely low. Accenture, therefore, has tons of room to grow, acquire business, learn new things, take some risks, and take on debt to grow faster should competition ramp up.
Accenture could be the highest quality company that investors routinely miss when it comes to the “quality” discussion.