Accenture's familiar 3-6% growth guide is part bought, with new debt on the books, in a tougher market

The range looks familiar; what is inside it is not

Last year Accenture guided revenue growth of 2% to 5% in local currency and ended at 5%. For the year that began in September it guides 3% to 6%. But the chief financial officer said two to two and a half points of that growth will come from acquisitions.

Take those out and, by our arithmetic, organic growth is guided at a midpoint near 2.25%. Against roughly 3% organic growth delivered last year that looks like a slowdown, but the delivery came against an opening guide, set a year earlier, whose organic midpoint was 2.0%, by our arithmetic, after allowing for the acquired share. Opening guide to opening guide, organic growth is guided slightly higher; what rises is the acquired share of the guide.

An analyst said the guide implied an organic slowdown and asked what lay behind it. The reply pointed to the bookings total and a solid pipeline, not to an organic figure.

No single cause of the beat was material, management said

In June the company narrowed its range and said it expected more of it to be in play for the final quarter. That quarter grew 7% in local currency, above the top of the range it had guided. Asked why, management listed small things: more small deals, faster starts on new contracts, acquisitions and federal work that did better than planned, and letting staff carry over vacation time, which left people free for the demand. The chief financial officer said no one factor was material.

A beat with no material single cause says little about the next range, and which causes repeat is our inference: the vacation carry-over and some of the deal timing look to us partly one-off. The first quarter of the new year is guided to a midpoint well under what was just reported.

The missing growth is being bought, after a doubling of debt

Acquisitions are where the difference is made up. For the year just ended the company's guide climbed to about $9 billion by June, based on the anticipated closing dates; it spent $4.9 billion, and part of the plan closed in September on regulatory timing. For the new year the chief financial officer described another large round on top of the deals that closed in September: about $8 billion in all, by our arithmetic.

The company issued new debt in the fourth quarter; on the call the chief financial officer did not link it to particular deals. Long-term debt was $10.0 billion at the end of August, against $5.0 billion a year earlier, while cash was $12.8 billion. The planned purchases and the planned capital return together exceed guided free cash flow, by our arithmetic.

Q4 pricing was lower; the guide assumes intense competition

In December the company said pricing was improving in several parts of its business, and in March it said it saw improvements in some areas while operating in a highly competitive environment. On this call the chief executive said pricing was stable for the year but "in Q4, we saw lower pricing in many areas of our business". She added that the margin guide assumes continued intense competition.

The guide expands operating margin, on the adjusted result that excludes business-optimization costs. Last year's 0.2-point gain was split about evenly, by our arithmetic from the release, between gross margin (32.0% against 31.9%) and selling, general and administrative costs as a share of revenue; the data cannot say how much of the gross-margin gain was price. Earnings per share are guided up on a smaller share count, which by our arithmetic leaves adjusted net income growing about three points less.

What would have to be true, and when we will know

For the plan to work, the acquired revenue has to arrive on schedule, organic growth has to hold its recent pace with pricing lower, and the extra purchases have to be found at sensible prices. An owner gets hurt in one of two ways: acquired revenue disappoints and the goodwill carried against these deals is tested, or price erosion reaches the margin once the cost savings run out.

The company beat its adjusted earnings guide last year. It will say more at its investor day on 14 October. A range that keeps being beaten says less than what it is made of. This year the company has said that more of it is bought.