PricewaterhouseCoopers LLP UK turnover up 6%, profits grow 11%

PricewaterhouseCoopers LLP United Kingdom recently reported a 6% increase for FY 2007 turnover to £2.1 billion. PricewaterhouseCoopers LLP FY07 financial year runs from 1 July 2006 to 30 June 2007.

Of this:

• Assurance increased 4% to £947 million (core audit services grew 8%)
• Tax turnover sped up 13% to £667 million
• Turnover in Advisory grew moderately at 4% to £493 million (Performance Improvement Consulting grew by 8%. Net revenue growth in Corporate Finance was 12%)
• Revenue at Business Recovery Services unit (aka bankruptcy consulting) declined due to good economic conditions

Underlying net revenue increased 9% and underlying profit shot up 11% to £631 million from £586 million in 2006.

Average profit per partner rose 6% to £757,000, with partner numbers up to 822. 56 new partners were admitted on 1 July 2007, with 15 new partners recruited externally during the course of FY07.

Note that turnover includes expenses and disbursements associated with client assignments; and underlying net revenue excludes these items.
Recently we blogged that Deloitte UK reported even stronger results: Sales were up 16% and profits payable to partners were up 17%, profit per partner was £877,00. Deloitte UK has now turnover of £1.8 billion and profits of £572 million and 652 partners.

It appears that Deloitte UK is growing both the top and bottom lines much faster than PwC UK; we don’t have enough reported information to really analyze why this differential exists.

But if this is indicative of global results which are to come shortly, it may not be long before Deloitte beats PwC in revenue as Deloitte posts high double-digits revenue gains versus high single-digits revenue growth for PwC. We shall see in November 2007!

http://www.ukmediacentre.pwc.com/Content/Detail.asp?ReleaseID=2448&NewsAreaID=2

Ouch! BearingPoint Stock Dives 12% to New Low

BearingPoint Inc. dropped almost 13% to $4.80 today in mid-day trading hitting a new all-time low. BE shares have traded between $5.49 and $9 in the past 12 months.

Late last week, the company revealed in a SEC filing that net loss for Q1-2007 reduced as sales increased and costs declined. Quarterly net loss of $61.7 million or 29 cents per share improved from loss of $72.7 million, or 34 cents per share in Q1-2006. However, revenue edged up 4% to $866.3 million from $833.7 million. Analysts polled by Thomson Financial were expecting revenue of $877.5 million.

Upon this news, many analysts reduced their 2007 earnings expectations on seeing slower-than-expected margin improvements. Yet investors and analysts fretted over company base costs which didn’t go down far enough and anticipated to continue at this level. 2007 earnings estimates as a results were drawn down. Equity analysts estimate Q2 and Q3 of 2007 to come in at 7 cents per share and Q4 at 8 cents per share.

According to news reports, analysts uniformly reduced their EPS and target price, but kept their revenue estimates unchanged as they believe the top line continues robust and the issues lie in the cost side of the company. Sales for the year are expected to be around $3.6 billion.

The Citigroup analyst dropped his Q2-2007 EPS estimates to 2 cents from 12 cents; Q3 to 4 cents from 9 cents; and Q4 to 10 cents from 18 cents. Overall this is a cumulative drop of 23 cents putting the year at 18 cents.

JPMorgan says 2007 estimates are only 3 cents per share on sales of $3.54 billion. Previously JPM had 39 cents EPS on sales of $3.56 billion expectations.

Goldman Sachs also lowered 2007 EPS by 23 cents to only 5 cents for the year.

All in all, continued poor performance, instability in the financials, losses in clients, high involuntary turnover and delayed reporting are all taking their toll on investor confidence and on the stock price.

CapGemini Pushes Google's Office Suite - Takes Lead

Watch out Microsoft!

We see that CapGemini will start to push Google online office software (email & calendar management, word processing, spreadsheet) to its corporate clients. This happens to the first time that a large technology consulting (and Big Four) firm is partnering with Google for this set of services. Earlier we had blogged that BearingPoint had partnered with Google to apply its corporate search application to customers.

What this means is that Google is aiming at the lucrative PC market in corporate customers. And with Capgemini’s help, they can now begin to influence software purchases in more than 1 million PCs in companies worldwide. Now, CapGemini is not entirely focusing on Google, but will continue to support software by IBM and Microsoft.

Google’s application suite is based on a usage basis with a annual charge of $50 per user per year. This has been of great appeal to small businesses and universities owing to their tighter budgets, but it has been hard going for Google to enter the much more sophisticated, demanding and security-conscious corporate IT market. Interestingly, Google’s software is online, so users have to be in general connected to the internet to gain access. Whereas Microsoft’s suite resides on the hard disk, so it is truly portable and doesn’t need to be online, a big help to traveling executives.

Google didn’t make a whole lot of money from this – only $70 million from sales of software licenses and other services in 1H-2007, a drop compared to the billions from search services.

With this partnership, they not only are gaining credibility, but also a key player in the IT space. CapGemini is the first of the Big4 to do this, and we will see if BearingPoint and Accenture, who are in the same space follow this lead.

KPMG Sued in Canada

Here’s an interesting one….KPMG in Canada has been served with a class action lawsuit by former employees that it forced hundred of (mainly tax accountants and auditors) employees to work overtime without paying for such additional time. The lawsuit seeks at least $20 million in punitive damages.

The suit claims that employees were made to routinely put in more than 90 hours a week to finish projects and keep clients satisfied. Employees were allegedly made to “eat their time” if they worked any extra hours over what was specified in the project schedule or committed to by their clients.

The case illustrates Alison Corless, a tax assistant, reportedly is seeking $87,000 in unpaid overtime based on the number of actual hours worked versus number of hours paid.
It is common practice in professional services / accounting / tax firms that employees generally work longer hours than their stipulated chargeable hours, such hours may not officially get logged in order to keep the engagement financials intact, but may be necessary to keep clients satisfied. In competitive situations when the engagement is won, hours are estimated but circumstances may require additional working time, and this makes employees being asked to “eat their time” and not charge to contract.

While this is common, it appears there is a fine line whether it does or does not meet local labor practices. The suit alleges that KPMG was in violation of overtime laws. KPMG is still studying the suit before it makes a response.

This is a tough call for the Big Four, if they have to continually monitor the additional hours which are routinely needed against potential law suits which could arise several years after such incidents. Also, it creates another avenue for risk (in addition to clients, shareholders and others) to manage, control and mitigate.

This happens to be the second such lawsuit in Canada, in June 2007, a similar class action was filed against Canadian Imperial Bank of Commerce in Ontario.

We are curious to see how this will turn out, since it is hitting at the heart of professional service operations. Will KPMG be able to overturn this, or will the ex-employees prevail, in either case it has large implications for the industry.

PwC Pays $3 million to Justice to Settle Allegations

PricewaterhouseCoopers LLP and IBM are paying $5 million to settle allegations that both these firms made improper payments on government technology contracts. PwC’s share: $3.2 million, IBM’s share: $3.0 million.

The Justice Department said that these companies solicited, paid money or provided other benefits to several companies. This is in violation of federal law. Both PwC and IBM said this settlement does not admit that they are guilty and they specifically denied the kickback allegations.

This is part of a larger investigation, which includes Accenture, another Big Four firm. The federal government indicates that these companies formed alliances and paid kickbacks to government consultants which were supposed to provide independent opinion on which IT systems to purchase.

In fact, this relates to PwC’s former consulting unit which was involved in this lawsuit/ PwC Consulting was sold to IBM in October 2002. PricewaterhouseCoopers said that "(We) believe that the allegations of the complaint characterizing conduct as 'kickbacks' are completely without merit as to the firm, but chose to settle the case, without any admission of wrongdoing, in order to avoid the expense, distraction and uncertainty of litigation."

In settling, PwC is avoiding tons of money to be paid to lawyers and undue distractions as well as finger-biting waiting on legal outcome.

E&Y Has Big Growth Plans for China

Ernst & Young wants to increase its Chinese staff from 8,000 to a whopping 32,000 in ten years, a nearly 400% increase. The hot Chinese economy is creating terrific demand for Big Four services and Big Four personnel. Every Big Four accounting firm is bursting at the seams with demand and business, moreover job hopping is becoming common, and companies are complaining about the shortage of experienced audit personnel.

So, large influxes to the Big Four are likely to happen, and at an increasing rate. E&Y wants to open 2 to 3 branches each year (from current number of 10 branches) for the next few years as it goes deeper into Western China. E&Y’s CEO, James Turley, says, "We need to have a firm in China in the next foreseeable future, you know, 10-plus years, and we are not talking about 8,000 or 9,000, we are talking about 25,000, 28,000 or even 30,000 staff in China."

Ernst & Young last year became the official auditor for the listing of Industrial and Commercial Bank of China, which marked the world's biggest IPO of shares in 2006.
Many of other E&Y Chinese clients are big state-owned enterprises such as China Mobile. Ernst & Young took over a local accounting firm in 2001, making it the first foreign player to make such a Chinese acquisition.

China is growing at robust rates and will continue to grow at good rates far into the future, and will remain the focal point for international companies and professionals.

Deloitte UK Revenues Up 16%, Profit Soars 17%

Deloitte UK recently posted results, audit firms in the UK need to publish financials, unlike their counterparts in the US

Nonetheless, these profits are quite healthy and pleasant to disclose:

For the year ending May 31, 2007 profits available for distribution to partners and retired partners was £572 million, up 17% from previous year; and revenues grew to £1,802 million, up 15.6%.

In terms of revenue, tax was the fastest grower, up 19%, corporate finance was up 16%, audit up 14% and consulting was up 13%.

In terms of operating profits, consulting was the fastest grower, up 28%, Corporate Finance was up 25%, audit up 5% and tax up 16%.

Operating margin % for the entire firm was 31%, improving from previous year.

Deloitte now provides significant services to 95% of FTSE100 companies and works for over 80% of Central Government Departments, devolved administrations in Scotland and Northern Ireland and over 50 of the larger local authorities and regional bodies.

Deloitte said that “36% of total firm revenue was earned from clients for whom we are auditors. Within this 20% of total firm revenue related to audit fees."


More details from the press release:

Profit before tax grew by 22.3% to £564m and total profit available for distribution to partners and retired partners grew by 17% to £572m with very satisfactory performances across the four divisions but with profit growth in Audit growing more slowly, reflecting lower revenue growth in the core audit practice.

Average profit per partner - £877,000 (£765,000)
Profit share of Senior Partner and CEO £4,656,000 (£4,166,400)
The share of profit allocated to the partners who were members of the Executive Group - £34m.

In 2007 the average number of partners and staff in the firm was 11,300, an increase of 14% over the previous year. We recruited 1400 new graduates and promoted or hired from outside the firm 80 new partners.

These are strong results, and as we have noted before if Deloitte worldwide were to post good revenue growth and PwC were to be off just a little, Deloitte could become the Big Four firm with the highest revenues in due course. We will wait for results to come out in the next few months.

http://www.deloitte.com/dtt/press_release/0,1014,cid%253D169332,00.html