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How Accenture Can Maintain Its Free Cash Flow Trend

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Catalysts

Leading IT giant Accenture (ACN) continues to generate strong free cash flow driven by higher growth in revenues across all its segments. Moreover, the company’s signing of new deals has not only led to an increase in its bookings but also to an increase in its free cash flow. Over the last five quarters, the company’s bookings have remained strong, which clearly signifies that it can generate strong revenue growth going forward.

Accenture’s free cash flow has also benefited from higher deferred revenue driven by healthy bookings.

Accenture expects its free cash flow to be in the band of $4.6 billion–$4.9 billion for fiscal 2018. At the end of the first six months of fiscal 2018, the company had already generated free cash flow of ~$1.7 billion compared to the $1 billion it generated in the same period last year. It produced an average free cash flow of nearly $830 million every quarter.

Thus, to achieve its annual free cash flow target, Accenture has to generate more than $3 billion in the second half of fiscal 2018, which comes to ~$1.5 billion each quarter. The company managed to produce free cash flow of more than $3 billion in the second half of fiscal 2017.

Peer comparison

In the graph above, we can see Accenture’s free cash flow growth over the last five quarters. During the period, it maintained an increasing trend.

In the last five years, it has maintained an average free cash flow of $3.7 billion each year. In the same period, IT giants Microsoft (MSFT), IBM (IBM), and Oracle (ORCL) have generated average annual free cash flows of nearly $26.3 billion, $13 billion, and $13.1 billion, respectively.

Accenture’s strong capital return policy coupled with its aggressive acquisition goal could affect its free cash flow going forward.

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