埃森哲 (ACN) 2002 Q2 法說會逐字稿

Ladies and gentlemen, good day, and thank you very much for standing by.

Welcome to the Accenture Q2 Fiscal Year 2002 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question-and-answer session.

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I'll now turn the conference call over to Director of Investor Relations, Miss (Carol Myer).

Please go ahead.

Thank you, Operator.

And thank you, everyone, for joining us.

With me today is Joe Forehand, Accenture's CEO; and Harry You, Accenture's Chief Financial Officer.

By now, I hope you had an opportunity to review the news release that we issued earlier this morning.

Joe will begin our call with a summary our results, and then Harry will comment on some of the detailed numbers.

And we'll follow these remarks with time for Q&A.

As a reminder, when we discuss revenues during today's call, we are talking about revenues before reimbursements, not net revenues.

Some of the matters we will discuss in the conference call are forward-looking, and I would like to advise you that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, general economic conditions and those risks set forth in today's press release and discussed under the (headings) Risk Factors in our registration statement Form (F1) filed with the SEC.

Accenture assumes no obligation to update the information presented in this call.

So now let me turn it over to Joe.

Thank you, Carol, and good day to all of you, and thanks for joining us.

We are here in London this week.

Let me begin by saying that I am pleased overall with our second quarter results.

As you know from our news release, our operating results exceeded expectations.

Our year-over-year net revenue growth for the quarter was one percent in U.S. dollars and three percent in local currencies.

Looking at our bottom line, we achieved operating income growth of 10 percent.

Diluted earnings per share were 23 cents, compared to 21 cents on a comparable pro forma basis in the same quarter of the previous fiscal year.

Geographically, our Europe, Middle East and Africa area continues to be strong, with revenue growth of 10 percent in U.S. dollars and 16 percent in local currency over Q2 last year.

This accounts (up) now for - our business in Europe, Middle East and Africa now accounts for 43 percent of our total Q2 revenue, now making (EMEA) approximately the same size in terms of revenue as our business in the U.S.

In the Americas and Asia/Pacific, we still feel revenue pressure, with a modest improvement in the Americas.

If you look at our operating groups, our government and resources groups once again show the strongest revenue growth with 36 percent, 11 percent - 11 percent (respectively).

Our government business continues to generate solid growth as we see governments around the world modernize and see the value in our e-government offerings.

And this group also achieved several milestones related to the - some of the large value-based contracts that we have in government.

In resources, we've had steady growth.

It's been driven primarily by good consulting work in Europe and Asia, (and) as well as our transformational outsourcing work, particularly in North America.

We saw slower revenue growth in our products operating group at one percent, due to the softness in the U.S. which has affected demand from our automotive as well as our travel and transportation industry groups.

On the other hand, our retail, our consumer goods and services, as well as our overall industrial equipment industries, experienced some positive revenue growth.

And we also continue to see growth (for) our services in helping pharmaceutical companies and biotech companies improve their performance.

As we look at communications and high-tech, the continued impact of the U.S. economic slowdown has affected all three of our industries in that particular operating group.

It experienced a seven percent in revenues.

However, that should certainly be viewed in the context of the industries we serve in communications and high-tech.

In fact, in the past year, if you look at our top 45 clients in this operating group, they've seen their combined market capitalization drop by 25 percent - or approximately $600 billion.

So although our revenues were down, these results are impressive given the challenges that our clients are facing in this sector.

And finally, our revenues in financial services decreased by six percent, due primarily to the depression of the capital markets industry resulting from the economic slowdown and the events post-September 11th.

And this impact has been greatest in the U.S. and the U.K.

However, we've seen a significant uptake in new bookings based on some of our assets

market options related to integrated bank processing as well as insurance claim offering.

So gives you a little bit of a color on our five operating groups.

Business transformation outsourcing - which remains a bright spot - helped us achieve 21 percent revenue growth in outsourcing for the quarter.

In addition, new bookings for business transformation outsourcing - which is a combination of our consulting and outsourcing services - accounted for nearly 60 percent of the new bookings for the quarter.

In total, we believe these results demonstrate our ongoing ability to provide clients with the services and solutions they require, especially in these challenging times.

And once again, I want to recognize just the tremendous efforts of our 75,000 people - those who work side by side with our clients each day as well as those who help ensure we manage our operations efficiently.

And (it's) really our people that continue to make the difference in our performance.

Let me shift to the future.

As we look at the near-term outlook, there are clearly mixed signals in the environment.

Overall, we continue to remain very cautious as we believe this growth - that any growth in this economy will surely be gradual.

On the positive side, our overall utilization continues to be very high - in the mid- to high 70 percent range.

I'm also quite pleased we continue to pursue a number of large opportunities, including 12 of which are over $1 billion in potential contract value.

Because of our strong new bookings of long-term outsourcing agreements in the last six months, our backlog now is at an all-time high.

In fact, our outsourcing backlog is approximately 60 percent above where it was six months ago.

As you know, we have stated that we want to increase the percentage of our total business under long-term contract.

This is a very critical part of our strategic platform, as it helps us create a high-quality recurring revenue base on which to grow our business more consistently.

Last fiscal year, outsourcing revenue represented 17 percent of our total revenue, and outsourcing as a mix now is at a run rate that's in the 20 to 22 percent range this fiscal year so far.

New contract bookings are another source of positive news.

Those of you on the March 19 call heard that Q2 new bookings were $6.46 billion - our highest quarter ever.

New bookings for the first half of fiscal 2002 at $9.8 billion are also the highest for any two consecutive quarters in our company's history.

Let me just give you a flavor of some of these new deals quickly.

The following examples I'm going to discuss represent about 60 percent of our total new bookings for this past quarter.

With AT&T consumer, we signed a five-year agreement to help transform their long-distance sales and customer care operation.

We also signed a five-year agreement with (Centrica) - the British utilities leader - to help develop advanced systems, processes and

to coordinate (Centrica's) customer relationships across its British gas brand.

Early in the quarter, we booked several big deals we mentioned on the January call - namely our five-year contract with Cable (and) Wireless, expansion of our outsourcing contract with (Bell South) and our new multiyear initiative with our long-term client, DuPont.

More recently, we began a long-term strategic agreement with KLM Airlines to develop and maintain their web-enabled information systems.

With Thomas Cook - the U.K. travel company - we have a new outsourcing agreement over 10 years to create a shared services center to manage finance and IT.

And finally, we have added both new clients and projects with existing clients as companies choose Accenture to replace work done by the consulting affiliates of their auditing firms.

And while the financial impact has been modest, the entrée we have gained with several key companies is important to us in the long term.

But again, we don't expect a windfall here.

So while all these indicators are positive, the economic recovery - as I am sure you're seeing elsewhere - is moving very slowly, very unevenly, across the different industries and geographic regions.

Our clients continue to face pressure on corporate earnings as well as challenges in the political and economic environment - all of which have resulted in some delays for new projects.

In addition, we still see no sign of a pick-up in IT spending, which is an indicator for our systems integration work.

Pricing continues to be very competitive, with continued over-capacity in the industry.

The (resulting) - for us, the results have created about a 300-basis-point erosion in margin that (we've seen) from last year, although we have offset that by very aggressive cost-management actions we've taken.

Finally, to update you on the first month of our new quarter's - quarter three bookings - as we've done on each quarterly call - new bookings in March are $1.2 billion - the mix approximately 55 percent consulting and 45 percent outsourcing.

And March is our seventh consecutive month of new bookings over $1 billion.

On balance, we continue to manage our business cautiously in an uncertain economic environment.

There are two additional topics I'd like to cover before I hand the call over to Harry.

First, I want to comment on our share-management program.

One of our objectives with the share-management program and the (planned) secondary offering is to contribute to an orderly and more liquid market for our shares in the long term.

As we said at the time of the IPO, we must enable our partners to achieve reasonable objectives and liquidity and prudent diversification with respect to Accenture shares.

As you've told us, we need to do this in a way that protects our long-term share price and expands the size of the publicly traded float of Accenture shares to provide greater trading liquidity to both our current as well as future investors.

I know you've had some questions about our approach, and let me reiterate that we do not intent - I repeat - we do not intend to change the overall architecture outlined in the IPO prospectus.

By that, I mean the eight-year-old (lockup) and liquidity schedule.

There will be no material change in timing, but what we would like to do is have secondary offerings in the first part of the calendar year rather than in July.

I do believe that the share-management program in its entirety is in the best (interests) of all of our shareholders.

Through this program, Accenture hopes to demonstrate that we are unique in both our vision and commitment to protect and advance the collective financial interests of our shareholders.

The second topic that I'd like to address is the Enron/Andersen matter.

There had been some media speculation that Accenture might be named in one or more of the amended complaints filed earlier this week in Houston.

As we have said before, we are confident that Accenture has no liability whatsoever in this regard.

Accenture was not involved in any way in Andersen's relationships with Enron that are alleged to have contributed to Enron's current difficulties.

We have entered into (tolling) agreements with the plaintiffs in the two pending lawsuits involving Enron and Andersen that were amended earlier this week to add a number of additional parties.

Under the agreement, Accenture was not named in the consolidated complaint, but the lead plaintiffs do reserve the right to file complaints or add us (to) litigation at a later date.

However, we firmly believe that we have no liability whatsoever in the Enron/(Andersen) matters and we're confident that once the plaintiffs fully understand the facts, they will see that any attempt to name Accenture as a party would be inappropriate and misdirected.

With that, let me pause here and turn the call over to Harry, and we'll give you more details behind our results.

Thank you, Joe.

Net revenues for the second quarter finished at 2.91 billion, representing one percent growth.

Earnings finished at 23 cents per share, with operating margin at 13.3 percent of net revenue.

Operating income growth for the fiscal year to date is at eight percent.

Unbilled services decreased seven million and receivables from clients decreased 149 million from the first quarter.

Deferred revenues, on the other hand, decreased 210 million from the first quarter due to weakening economic circumstances and our clients' reduced willingness to agree to pre-billing.

Our net working capital change for the period is a net increase of 54 million, of which 45 million is attributed both to the acquisition of (E-People-Serve) and the acquisition of a larger interest in (Avenon).

Operating cash flow was strong in the second quarter at over 450 million.

(Sale day) services outstanding improved to 42 days from 45 days at the end of Q1.

Cash balances were at 1.13 billion.

We believe that the company's financial situation is very sound and continues to meet out commitment of having industry-leading credit and cash-flow ratios.

Yesterday, our board approved a repurchase authorization for the Share Employee Compensation Trust - or SECT.

We will retain an independent fiduciary to administer the plan.

The 300 million repurchase authorization will be effective immediately and will represent a repurchase plan distinct from and independent of Accenture's current 250 million stock buy-back program.

As I described last month, we will be presenting our employees with an exciting array of equity-based instruments that will form the basis of the new partner equity incentive for many years to come.

The SECT will offer a transparent and minimally (dilutive) way to give equity-based compensation to future generations of Accenture partners.

As Joe described, our global revenue outlook continues to be more restrained than we would like.

At this time, we are tracking to analysts' consensus revenues of about three billion.

There is, however, more volatility around our revenue forecast in the current environment because of earnings pressures on our clients.

On (EPS), we are comfortable with analysts' estimates of 26 cents per share for our fiscal third quarter.

We are still working through the details of the cost reductions we committed to you in order to offset the losses in the venture and investment portfolio.

When appropriate, we will also apprise on progress on the liquidation of the portfolio, which so far is proceeding very well.

In summary, the challenges in the near term are significant ones, as Joe and I have been consistently saying to all of you over the last several months.

We are confident, though, of our ability to continue to drive toward growth as the global economy improves, and to continue to gain significant market share in the process.

(Carol), why don't we open up the lines for questions.

All right.

Very good.

Ladies and gentlemen, again, as a reminder, if you have a question, please depress the one on your touch-tone phone.

You'll hear a tone indicating you've been placed in queue.

You may remove yourself from queue by pressing the pound key.

Once again, if you have a question, please depress the one at this time.

And our first question in queue is from the line of (David Togut), from Morgan Stanley.

Please go ahead.

Hi.

This is actually (Vivian Cervantes), calling in for (David Togut).

Good morning.

Good morning.

(Thanks.)

First question I have is what are your expectations of a turnaround for both the financial services and communications and high-tech industries in terms of timing and magnitude?

Well, I wish I knew the exact answer there.

I think the - if you look at financial services and communications in high-tech, you know, my sense is it's bottom out, it's stabilized.

Certainly in communications and high-tech there is still significant corporate earnings pressures and I think what we've been able to do is to gain market share in spite of some of the difficulties.

But, (you know), I think it's going to be a while before the economic environment in general for communications and high-tech sectors improves substantially.

And then I think on financial services, (there are) parts of financial services that are picking up.

And I think the capital markets part of financial services will take some - take some time - particularly the U.S. and U.K.

Great.

And as a follow-up question: The 9.8 billion in new bookings that has been currently reported - what is the time frame in which these bookings are going to convert to revenue?

Well,

...

(Or) how quickly?

The, you know, majority of the bookings come in year one.

However, what we're excited about is that the remainder get put in our backlog in subsequent years.

I think obviously there's a different run rate (in) each of the different outsourcing contracts in the new bookings.

The consulting projects tend to be shorter-lived but are sort of more rapid in terms of revenue (ramp-up).

And I think, as we've indicated in the past, the challenge of the current environment is that the consulting new bookings have been more modest and our consulting backlog - while it's increased in January, February and March relative to last calendar year, it's still be relatively flat.

And only when we see the pick-up - the true pick-up in a material way in that consulting backlog will we get some sustained or accelerated growth.

OK.

Thank you.

Thank you.

Our next question is from the line of (Adam Frisch), from UBS Warburg.

Please go ahead.

Thanks.

And I guess (it's) good afternoon over there.

Harry, could you give us a little bit of an update on the hiring picture - when people are coming off (of) furlough, and if you still plan to hire - I think in past calls, (you've) said roughly 6,000 people or so give or take, by (the end of the) year.

(Adam), you broke up on the last part there.

I'm sorry.

Sorry.

The - if you still plan to hire - I think (you've) said in past calls about 6,000 people before the end of the year.

Yeah, I think we're still tracking on that.

Our Q3 headcount forecast is to grow headcount at about one-and-a-half percent. (Flex-leave) people are coming back.

And as we've said before, we have, you know, modest hiring through the end of the year.

I think our (gross) hiring for Fiscal Year '02 will be about 8,500 people.

And the total deferred people is about 4,250 from last fiscal year - Fiscal Year '01.

And right now, turnover, (Adam), is roughly running on an annualized rate of about 12 percent.

OK.

The (BPO pipeline) - good to see that the number of large deals is actually inching up a little bit - I think by about 20, 25 percent or so.

Where are we in terms of the new deals - or how many are (sole-source)?

I guess the usual stats would be helpful here.

Where are some of the newer opportunities?

Are they in areas that you're - that are building on things that you've already signed, (or are) you getting into even more newer areas?

Well, I think we are getting into some new areas.

It's hard to predict when these contracts will get signed.

But on a couple of them, they're very interesting opportunities with technology clients that will be new areas for us in (BPO).

So we're keeping our fingers crossed that we can, you know, describe these to you hopefully in the near future.

In terms of (sole-source), I think, you know, we're still consistently at a little bit under half of the bigger opportunities - not only the billion-dollar ones, but the ones that are over 500 million - which are not (RFP), which are based on our strong relationships with clients.

OK.

And then I guess my last question is an update on Europe.

I know (it) grew 12 percent.

Where do you see it going from here given your comps get a little easier - not too much so, but a little easier in the next couple quarters.

Do you see (the) stable growth around still in the low double-digits, or are you expecting maybe a different trend there?

I think the sense we have is Europe is about a quarter behind the U.S. in terms of recovery, but we've doing very well - as we've mentioned to everyone - in terms of gaining market share in Europe.

I think in the last few weeks, Germany's been a little bit softer, but other than that, Europe has been consistently strong. (And) I think we're watching carefully some of the potential financial restructurings in Germany in terms of whether that might affect the business environment.

But generally speaking, Europe is still looking good for us.

OK.

So low double-digit growth should be the expectation there?

Yeah, I think that's a fair assumption, (Adam).

OK, great.

Thanks, guys.

Thank you.

Thank you.

Our next question is from (Greg Gould), from Goldman Sachs.

Please go ahead.

Thanks.

Harry and Joe, (can) you talk about purchasing patterns?

What are you seeing with respect to new customers coming into the pipeline versus

(mining) business from existing customers?

Is there a way to look at that?

Yeah.

You know, obviously, as we've talked about in the past, if you look at, you know, our business, a bit part of the strength of that is the client base that we've had, (with) relationships that oftentimes (span) a decade or more.

You know, there has been new clients that we've brought in, and that's exciting.

One of the things I think if you look at the buying patterns, we've been focused a lot on - as you may have seen, some of the things around our organization announcement continue to try to look at the assets that we have, our solutions, as we build solution-unit capabilities.

For example, (Alnova), our financial services

bank offering, we have a claims-processing offering in financial services in those solution units that are driving those

provide a good entrée for us to take an asset and then use that to gain entry to new clients.

So there's some of that (that's) - we get new clients because we have a unique set of capabilities or offerings, and that's going (to be a) part of our strategy - and a big part of our strategy - going forward.

And that's part of the organizational changes to continue to get more critical mass around how do we take innovation, scale it up on key areas such as the Accenture Learning Solutions.

We've got a good pipeline of new e-learning opportunity with some of the technology that we've got patents on. (There's) a good pipeline coming there.

And that gives us the opportunity to crack into some new clients that we may not have historically done, and that's starting to take shape, as well.

So that's a little bit of the strategy in how we're using the assets that we create to gain some new clients.

(Greg), it typically runs at about the - if you look over the last several years, about 90 to 95 percent of our revenue base is from existing clients.

And so maybe we'll see, you know, a little bit of increase in the new-client, you know, percentage here with the (order independence) issues which Joe described.

And also we have gotten some traction in terms of some of our own, you know, proprietary offerings.

And how about in terms of new contracts - new

starts?

Is a lot of your work the new (signing) extensions or expansions of existing engagements, or are they brand-new scope, brand-new contracts?

(You know, it's), I think it's fair to say, is a mix of both.

We've got a lot of new - there's still a lot of - even though the - certainly the buying environment is certainly slow, it's not dead.

And there's a lot of - there's still a lot of new work beginning.

You know, one of the things I think that's missing in today's environment that we've had over the last several years (is) there's no big, huge, new, scaleable technology event (that's drawing) new buying.

You know, we've gone through - whether it was enterprise planning (system) surge, the Y2K, the Internet - you know, and right now there's a lot of rationalization of technology that's been bought - trying to get the value of it - you know, (Web) services are certainly forming but (they haven't scaled up).

And I think we're - I think to some extent (there's) - (and) from a technology standpoint, we're in a pause period.

And I think that's a little bit of what we see going on.

I think, (Greg), you know, where we've gained a lot of market share is I think we've transformed our business, especially in the outsourcing area.

And, you know, those are obviously very significantly different engagements with clients - either existing clients or new clients - than what we've had before in consulting.

So we've probably done better by shifting the mix and doing newer stuff, so to speak, than some of our competitors.

Great.

Thank you.

Thank you.

Our next question is from (Dirk Godsey), from JP Morgan.

Please go ahead.

Good morning.

I was wondering, Harry, if you can give us the sense for what your target growth rate would be for fiscal '03.

I think on the last preview call, you had upped your earnings guidance by a couple pennies for fiscal '03, but we didn't get a revenue target.

Are you able to do that at this point?

No, we're still working on it.

We'll roll that out to you, (Dirk), on July 24th at our first annual analysts meeting - that will not only be the industry research analysts, but all of you in the investment community, as well as our credit-rating agency, so we're looking forward to that.

I think very frankly, we're going through the normal budget planning process now, but I think any extra time we can get, given (that this) environment is quite uncertain, is going to be helpful to setting the targets for next year that we can be comfortable with.

Understood.

On the (call that was) - comment was made that pricing remains competitive - and you put that down in terms of basis-points deterioration there.

Can you give us the trend and bill rates in utilization by the major geographic areas?

Well, I think in terms of utilization, we were up slightly in the last (sort of) two- to four-week period.

I think most of the geographies are actually up, you know, with the exception I made of Germany, which (has) softened just a little bit.

I think Canada and Spain are down slightly, as is Japan.

But those, you know, countries are at acceptable utilization levels - Canada - Spain, excuse me, is always at a very good utilization level.

So I think in general we're, (you know,) seeing, you know, incremental pick-up in utilization.

But I think, you know, once again, the cautionary note is, you know, we still don't have a consistent pattern and I think until - and why we keep emphasizing pricing is until, you know, we see pricing materially improve, then I think it'll be tough to truly call a turnaround in the environment here.

I think the excess capacity which Joe talked about manifests itself in terms of pricing very directly.

And I think when the pipeline starts to fill up for some of the second-tier players in our industry, that's also going to be when the overall industry feels healthier.

Got you.

And is there any overall pricing trend, though, as you were to compare, say, (EMEA) with the United States?

Is it - is the pricing pressure more pronounced in certain areas of Europe, or is it really pretty much across the board?

You know, (our sense is) not any material difference.

You know, we look at pricing and we can see that there's about a 300-basis-point - and we really focused more on - more on the (gross) margin, just because we don't price our work to a billing rate card all the time.

So that 300-basis-point erosion in margin - more is dependent on the particular industry, I think, to some extent, and the situation on a client-by-client basis as to the - what the value we provide, how competitive it is and the unique circumstances.

And we've focused on making up for that erosion in margin just with some aggressive below-the-margin-line cost reductions.

OK. (Thanks.)

(You) basically offset the pricing (issue).

OK.

Thank you.

Operator, I think we have time for just one more question, please.

Very good.

Our next question is from (Patrick Burton), from Salomon Smith Barney.

Please go ahead.

Yes.

Just wanted to know, you know, what (specific) applications you might be seeing any strength in - say, for example, (STM) or (CRM), (ERP)?

If you could comment on that, please.

Thank (you).

Well, I think we're seeing consolidation around the larger software players.

I think the (ERP) market is fairly robust.

I think we're doing a lot of work relative to Microsoft and their new platforms.

I think some of the stronger (CRM) players like (Seybol) seem to be doing well.

But there still is a lot of flux in the rest of the software market.

OK.

And a follow-up, if I may: You mentioned pricing.

Is there - (could) you care to name maybe a (specific) source - say, offshore competitors who are responsible for pricing pressure?

Or is ...

(You know what?).

I think it's really hard to say that it's any particular competitor.

As Joe described, it's not a particular geography, it's really, you know, case by case.

I mean, we're in, you know, 47 countries and 87 of the top hundred companies in the world, so it's really a broad spectrum.

I think there is a trend towards industrialization of systems integration, which Joe has talked about a lot, and which we're making sure we're prepared for.

But I think, you know, right now we just have a global economic weakness which is driving pricing being lower - either in terms of clients being more sensitive about rates or some of our competitors anxious about maintaining some reasonable capacity utilization.

OK.

Thank you.

And congratulations on the quarter.

Thank you.

Thank you.

And Operator, that's all the time we have for questions this morning.

If the analysts have any additional questions, please feel free to call me directly.

And members of the press and the industry analysts should direct their questions to (Roxanne Taylor).

Thanks very much, everyone.

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