埃森哲 (ACN) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Accenture Q3 2002 earnings conference call.

At this time all participant lines are in a listen only mode.

Later we will conduct a question and answer session.

If you have a question depress the one on the touch tone phone.

You may remove your telephone from the queue by pressing the pound key.

This call is being recorded.

I will turn this over to Carol [Meyer], Director of Investor Relations.

Thank you operator and thank you everyone for joining us.

On the call with me today is Joe Forehand, Chairman and Chief Executive Officer of Accenture: and Harry You, our CFO.

We are pleased you are joining us today for our third quarter earnings announcement.

By now you have reviewed the news released this morning.

First we will have Joe provide you with his comments on overall results and key priorities.

Harry will speak to the detailed numbers and we will save some time at the end for questions.

As a reminder when we discuss revenues during today's call we are talking about revenues before reimbursements for net revenues.

Some of the matters we will discuss on the call are forward-looking.

We would like to advise you that 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 factors set forth in today's press release and discussed under the heading risk factors in our registration statement on form S1 filed with the SEC.

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

Now it's my pleasure to turn the call over to Joe.

Thank you, Carol.

And good morning to 00:59:44 all of you.

I want to thank you for joining us.

And what 00:59:49 continues to be a challenging economic environment around 00:59:52 the world.

I think we perform well during the quarter. 00:59:55 We achieved the bottom line objectives and generated good cash flow.

As you know from our news release, revenues for the quarter were $2.98 billion.

Year over year revenue growth for the quarter was 1 percent in U.S. dollars and 3 percent in local currency.

Our operating income for the quarter was 435 million, which is 14.6 percent of net revenues.

Our diluted earnings per share were 27 cents compared to 26 cents on an adjusted pro form a basis in the same quarter of the previous fiscal year.

On a geographic basis, our business in Europe, the middle east and Africa continues to perform well with year over year revenue growth of 4 percent U.S. dollars and 6 percent in local currency, although growth has slowed some from previous quarters.

In the Americas, we had flat revenue growth in U.S. dollars and 1 percent growth in local currency which is an improvement from the prior two quarters.

The Asian Pacific region representing 6 percent of our total revenues continues to battle a sluggish economy and revenues decreased 8 percent in U.S. dollars and 5 percent in local currency.

I will tell you we made significant organizational changes in that region and have a new operating structure in place designed to maximize growth and assure that we are cost competitive.

Let me turn now to our operating group results this quarter.

The two areas I want to highlight are communications and high-tech and financial services.

Communications and high-tech grew revenues by 8 percent year over year.

I'll tell you, we are pleased with this, given that the extreme challenges our clients face in these industries.

Growth was due to increased revenues from some of our large transformational out-sourcing contracts which offset lower consulting revenues.

We are concerned, however, obviously this sector has continued challenges ahead in many of the industry sectors in communications and high-tech.

Financial services, we felt the greatest impact this quarter with 16 percent decline in revenues year over year due to the continued severe downturn, principally in the capital markets industry.

Also our financial services work in Europe softened this quarter.

Once again, government was our top performing operating group.

They had year over year revenue growth of 19 percent.

This quarter's growth was driven primarily by significant work with U.S. state governments as well as with national governments in Europe, mainly and the U.K., France, and Spain.

Our resources operating group grew revenues 3 percent year over year largely due to the strength of the chemicals industry.

Products also grew at 3 percent year over year to growth in both retail and in the consumer goods and services industries.

As well as continued demand for ERP, procurement and supply chain work.

That gives us a feel for how each much our operating groups performed in the third quarter.

Our emphasis on business transformation out-sources helped us achieve a 38 percent year on year growth in out-sourcing of the quarter.

Let me turn now to the new bookings which were $3.54 billion for the quarter.

Key client wins included - I want to go through some of these.

We signed a multi year agreement with Caterpillar.

World's leading manufacturer of construction and mining equipment to deploy and support their next generation of dealer systems.

This is significant because it also extends an arrangement we have had with a 15-year relationship with Caterpillar.

In late March we signed a five-year contract with the London stock exchange to provide development services for their core information and trading systems.

This work will run concurrently with our existing out-sourcing contract extended last August to run the exchange's technology infrastructure until March 2,007.

With Air Gas, the largest U.S. distributor of industrial and medical specialty gases, we signed a contract to manage their shared financial services center.

Air gas will out-source its general ledger fixed assets and accounts payable processing to our operation in Wilmington, Delaware.

We were selected to help Group [Benone] design and build and deploy an SAP-based resource planning solution at more than 30 of its business units in both the Americas and Europe.

We signed a new contract with the Belgian ministry of affairs to develop a government web portal.

This interface will provide their 10 million citizens, businesses and organizations with access to a wide range of government information and services via the Internet and eventually facilitate on line transactions.

This is part of an offering that our government operating group has been working on with many governments around the world, with this portal opportunity.

We won a seven year contract with Resort Condominiums International, a leading time share service provider to machining and operates their European financial operations.

Under this agreement, approximately 65 RCI Europe professionals will become Accenture employees working to support RCI's financial and finance operations across Europe.

So that gives you a bit of a flavor of some of the new work we won last quarter.

I also want to mention a contract win we announced this week with EMC, leader in information storage systems and services through a very innovative five-year business transformation out-sourcing agreement.

We will provide the consulting, delivery and the management expertise to EMC's newly informed information solutions consulting group.

Accenture and EMC will each provide professionals to this group which will offer strategic storage consulting services to help customers streamline business processes, gain efficiencies and better leverage all of their heterogeneous storage processes.

We think this contract with EMC is an excellent example of how we can use the breadth of our capabilities and skills to help a company transform their business in very innovative ways.

It's another great example of how we look at business process out-sourcing.

So looking back on the quarter, we are pleased that both existing and new clients continue to call on the talents of our people and our global organization to help improve their business results.

We demonstrate the needs of our clients in what appears to be a challenging time and our people have risen to the occasion here.

I will discuss the challenges we see ahead.

The near term out look is filled with uncertainty and mixed signals.

As you expect, we are managing our business very cautiously.

I did want to mention a few positive indicators.

Utilization continues to be in the high 70 percent range globally.

So that's not an issue with us.

Our pipeline continues to grow, particularly in out-sources.

The value of the pipeline is up 9 percent from the second quarter.

This represents well over 100 opportunities that consist of the threshold of $100 million for each opportunity.

But I also would tell you in this uncertain environment, the time it takes to close new deals is certainly lengthened from a year ago.

And also pricing pressure has resulted in continued pressure on our margin.

Looking for the, for a moment at the first month of Q4, June new bookings were $632 million, which you may note is the first time that new bookings have been under $1 billion any month this fiscal year.

This compares with new bookings last June of 876 million.

We noticed the fall off in new bookings particularly in the second half of June.

The mid June report it was looking good and then principally we had some delays as we have assessed the second half of June.

We have had some delays in some of the, a few large contracts particularly we had anticipated signing in the last half of June.

So we continue to face challenges.

But certainly our view is, we are not in a mood of waiting for the economy to get better.

We are confident our strategy.

We have turned up our engines to accelerate our execution.

So let me give you a flavor of some of the actions we are taking to both look at the growth, top line growth as well as what I call our organization to get Accenture fit for the race ahead in fiscal 2003 and beyond.

We have spoken about the strategic shift in the mix of work from traditional consulting and systems integration to more transformational out-sourcing.

One implication is that we need to optimize our profitability and ensure that we have both the right people and the right skills and the right areas of our business to serve our clients.

As we've looked at our fiscal '03 planning, we are currently targeting a net increase in global head count of approximately 8,000 people by the end of fiscal '03, with most new hires being in out-sourcing and at the entry level.

A major proportion of this increase is based on our assessment are the current out-sourcing pipeline I mentioned, and looking at our probability assessment of closing these new bookings.

Also we anticipate needing fewer people at the manager level and above, principally in consulting.

One reason we need to reshape our work force is that we have had unnaturally low attrition at the senior most levels.

To address this, we recently told our organization that globally we will be reducing about one to 2 percent of our client facing people, primarily at the manager level and above.

This is in addition to our normal counseling out of low performers.

We are going to be finalizing this over the next 30 days as we adjust the structure of our work force to begin the fiscal year and address the significant change in the mix of work that we are focusing on growth.

Also to address the shift in the mix of work and drive continue growth and out-sourcing, we are redeploying some of our senior consulting people to out-sourcing contracts.

We are redeploying several hundred more to what we see are higher growth industries such as government as well as health and life sciences, to name two.

Let me make one last comment related to cost structure and our ongoing efforts in this area.

Just like we did in Q3 we are going to be very prudent and continue to manage our cost structure, given the challenging top line growth environment.

Harry will discuss this more in a moment.

And then finally, I would like to make a comment to all of you about our view of the whole issue of business ethics, of accounting, and corporate governance.

And Harry will cover in more detail our position related to the accounting treatment of out-sourcing contracts.

I wanted all of you to know that we are committed as a company to be transparent in our accounting and to generate cash flow that backs up our earnings.

We also want to be a part of the solution in restoring investor confidence in business and leadership.

We are committed to full compliance with all regulatory and listing requirements.

We are stepping up as a measure of our responsibility as leaders of the business community.

Yesterday I sent a letter to Harvey pit, chairman of the SEC, saying that Accenture is wholly supportive of the commission's current proposal.

And Harry and I will gladly certify to Accenture's financial statements.

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

Thank you, Joe.

Let me elaborate on our results for the third quarter in fiscal year to date.

As Joe mentioned, net revenues for the third quarter finished at $2.8 billion, representing 1 percent growth in U.S. dollars and 3 percent growth in local currency.

Excluding our acquisitions of E-people serve and object not earlier this year net revenues for the quarter were 2.93 billion.

Out-sourcing revenues grew 38 percent and represent 23 percent of our net revenues.

Consulting and system revenues declined 10 percent for the first nine months of the fiscal year.

Out-sourcing revenues grew 30 percent while consulting and systems [synerzation] revenues declined 4 percent Geographically revenues in the Americas were flat for the third quarter and declined 4 percent for the first three quarters of the fiscal year.

Revenues in Europe, Middle East, and Africa grew 4 percent in the quarter and 14 percent for the first three quarters.

Asia Pacific revenues declined 8 percent in the quarter and 6 percent for the first three quarters.

We have been getting some modest benefits from the recent weakness of the dollar.

SG and A for the first three quarters of the fiscal year increased 6 percent as a result of the increase in selling expenses related to the transformational out-sourcing business which tends to have a longer sales cycle.

We expect, however, in our fiscal year '03 budget, SG and A will decline significantly.

Steve James, our chief operating officer, and I will discuss our key budget assumptions during our investor and analyst meeting in New York on July 24.

Our investment gains and losses line shows only a 1 million loss this quarter as we seized new venture investments.

As we stated previously, we expect the sale of our investment portfolio to close by the end of the calendar year.

Diluted earnings per share for the quarter were 27 cents which represents growth of 3 percent over pro form a earnings per share for the third quarter of last fiscal year.

We continue to get moderate operating leverage even in a muted top line growth environment.

The third quarter also represents our third straight quarter of maximum accrual of our quarterly variable partner compensation.

As you may recall, this compensation is paid out four quarters in a rears.

Also reflecting our commitment to you, our partners in public shareholders in response to the continued difficult economic conditions we increased our focus to further reduce our cost structure.

As a result of expense management efforts including executive level work force action, we reduced previously recognized annual bonus expense and recorded modest amounts of severance and other costs.

The net effect was a decrease in operating expenses of approximately $30 million.

Our annual bonus represents amounts that may be paid to our partners and associate partners at fiscal year end over and above the quarterly compensation and salary.

The total partner variable compensation and annual bonus accrual for the fiscal year are now over $250 million.

Total diluted shares outstanding for the quarter were 1.028 billion.

Performance based options for partners were previously authorized by the board.

However, senior management has decided not to award any performance based options this year because we believe that the overall earnings performance of Accenture does not merit diluteddive grants at this time.

As always, we will continue to be rigorous about minimum performance thresholds for all our employees.

Through yesterday, we have repurchased 249 million of shares of our original 250 million repurchase authorization.

We have also acquired an additional 145 million of shares for our sect.

Yesterday our board reaffirmed the remaining 150 million of our 300 million sect authorization.

In addition, the board authorized our partner liquidity plan which is described in our recent secondary offering perspective.

On the new bookings account 3.54 billion in sales for the third quarter, of which 41 percent were out-sourcing bookings.

Geographically 54 percent of the new bookings are in the Americas, 40 percent in Europe, Middle East, and African and 66 percent in Asia Pacific.

In June, we closed 632 million in new bookings, bringing the total to 13.9 billion.

Out-sourcing new booking accounted for 43 percent of this total.

As Joe described we had a few large out-sourcing transactions.

At this point I do not believe that one month makes a trend, as out-sourcings bookings were 111 million for June and we see new prospects for announcing deals in the coming weeks and months.

We continue to build our pipeline, though in some cases given the large size of the opportunities, it is taking longer to convert them into new bookings and some projects have been delayed given the corporate earnings pressures that many of our clients are facing, as well as the distractions relative to corporate disclosure and governance.

Our cash flow from operations continues to be strong, with 291 million in operating cash flow for the quarter.

Our cash balance was 1.113 billion with 104 million in restricted cash in our share employee compensation trust.

On our balance sheet, unbilled services declined slightly, to 899 million on May 31 compared to 923 million on February 28.

Date services outstanding at May 31 were 48 days.

Total debt for Accenture at May 31 was only 100 million, which we believe puts us in tremendously good stead in any economic scenario that may unfold over the coming quarters.

I am delighted we recently executed two new committed bank facilities totaling $1.075 billion.

We see no reason to draw down debt, but we believe having the facilities available is sounds financial management.

Let me comment on three other subjects that have been top cal.

We have detailed to you in the past, we continue to be vigilant about customer credit management.

Of total the inventory and receivable balances from our top 200 clients, only 75 million or approximately 4 percent is from non-investment grade clients.

Seconds, I would also like to comment on the recent media discussion about accounting relative to out-sourcing contracts.

Joe and I would like to assure you that our accounting of our out-sources contracts is accurate and stands the empirical test of time.

The estimate for completion of earnings for out-sourcing deals have accurately portrayed reality over the eleven years in which we have been involved in the out-sourcing business.

Our experience with these contracts gives us confidence that our estimates are recognizing revenues and earnings appropriately and our cash flow attests to the appropriateness of these estimates.

The audit committee has regular dialogue with our auditor about margin and recognition.

I would also like to comment on media coverage regarding the Bermuda registration.

First, Accenture did not do a Bermuda inversion since we were never a U.S. corporation and, therefore, we did not remove any tax base from U.S. jurisdiction when we initially incorporated in Bermuda.

We chose Bermuda for a number of reasons including the political reality of getting our partners to approve the plan to incorporate.

We paid all taxes in the countries in which we generate income.

Accenture pays and has always paid U.S. taxes on income generated by U.S. operations.

If you look at our footnotes that disclose effective tax rate is high relative to other U.S. corporations.

Second, we are totally supportive of the many thoughtful legislative actions currently being considered in Washington to address legitimate concerns about potential abuses.

We are monitoring all legislative developments closely and describing our facts to members of Congress.

Out of prunes we are looking at different scenarios that might arise out of possible legislation.

It's a complex topic where we need to consider impacts on all our employees, stake holders, clients including government entities around the world.

It is premature to speculate on what we might do.

But at this time we do not see it as having a financially material impact.

Finally, on guidance for the current quarter, we expect to earn 16 cents per share, which is the analyst consensus estimate.

We are confident we will achieve a $1.05 in earnings per share for fiscal year '03.

The revenue environment for the fourth quarter is similar to our February and May quarters, with year over year top line growth being difficult to achieve.

In fact, the fourth quarter may prove to be the most challenging since it is seasonally our weekest quarter with greatest volatility around revenues given summer holidays in most parts of the world

Once again, revenue forecasts are the most volatile in Q4.

We would say a single digit revenue decline is likely, certainly not a double digit decline.

At best we will have a growth profile similar to the February and May quarter.

In spite of this challenging environment we continue to be bullish about Accenture and the strides we are making to transform our business and take significant market share from our competitors throughout the world.

We look forward to the investor and analyst meeting in New York which will give us the opportunity to describe our budget and strategy for the next year.

A replay of the event will be available on the I.R. section of our web site after the event.

Operator, why don't we open it up for questions

Once again, ladies and gentlemen if you have a question depress the one on your touch tone phone.

First question from Adam [Frisch] from UBS Warburg.

Please go ahead.

Thanks and good morning.

Harry and Joe, you confirmed $1.05 for fiscal '03.

I wanted to know, I'm sure you worked through the disaster scenarios where if growth were beyond a certain point $1.05 would be in jeopardy.

Or you would have to cut so much that that would change the prospect.

Could you give us a little bit of color on that?

What is your thinking now for fiscal '03?

You think the $1.05 -

Adam, we are confirming a $1.05.

We have been very consistent in the several quarters in which we have been public.

We have met or exceeded our earnings estimates and I think we are comfortable, given the foreseeable range of economic scenarios that we can achieve a $1.05.

Joe, Steve and I will describe the parameters around a $1.05 and certainly we have looked at more austere growth or no growth environments to make sure that we make a $1.05.

Certainly as we look at our cost base, and I think we mentioned this to many of our shareholders over the recent months, while a very small percentage of our cost basis fixed, over short periods of time a smaller amount of cost basis fixed because it's embodied in our employees' payroll.

Because of that, we make sure as we budget for the new fiscal year, we properly structure our work force, we properly structure the mix of our resources and we make sure we come into each new fiscal year in sound fighting shape and are fit, as Joe described, to make sure we can drive strong cash flow and earnings.

As we look at how we operate our business, we are running our budget based on more austere scenarios so we don't have a cost base that is out of line even if we were to see a more difficult economic scenario in the coming months or for the entirety of the next fiscal year.

Okay.

Could you, Harry, talk about unbilled receivables and deferred revenues?

What are the plans for the way those are moving around?

I think as we told you in the past, we need to continue to work on our working capital management.

We made a slight bit of progress on unbilled services.

Steve and I are continuing to work on that subject.

I think deferred revenues declined as we have faced economic weakness in our clients, especially because, as you know, we have always been very prudent and timely on collections from our clients.

But we see no material changes in the deferred revenue area.

But most importantly, and I think this last quarter is a good signal or sign, we are focused on driving strong cash flow and we are going to make sure that in the next fiscal year we get improved operating cash flow from better working capital management.

Sounds good.

One last question on Europe.

Growth was down considerably versus last quarter.

Are you seeing it stabilize a little bit here?

Do you expect further deceleration?

August quarter will be tough because of vacations and so forth.

August is seasonally and sequentially going to be a slower time in Europe.

We don't see any major change in the European environment.

We have seen softness in particular in Germany.

We did see softness in our financial services practice in the U.K. and Germany as well.

But we are certainly not seeing anything that causes us any concern relative to Europe.

Adam, I might also add - this is Joe - in terms of the first question you asked, in terms of how we look at next year and are prepared for it, that there are a number of things we are doing where we believe we have to be more precise in how we grow this business.

If you look at our client base, many clients have been clients for a decade or more.

We are working closely with them to make sure we master, what I call mastering our client loyalty, increasing our penetration of those.

There are certain industry segments that we are not as well penetrated in, frankly, that we think we should redeploy some people to get more growth there.

In some markets we are not as active in some of the middle market opportunities that we can be.

So we are looking at those.

We are redeploying some people there.

I'll also tell you, we view that in the economic environment today, we certainly are focused on growth, but not growth at any cost.

Our focus is to ensure we can keep a strong financial position, good quality balance sheet and cash flow.

During this.

That's how we are looking at this next year.

Okay, Joe.

Thanks.

That was helpful.

Our next question comes from Greg [Gould] from Goldman Sachs.

Go ahead.

Couple of questions.

Harry, to zero in on the revenue for the fourth quarter, you said it was single digit year over year decline could be possible.

Are we, should we think of sort of a zero to down 5 percent as the most likely scenario for the quarter?

Greg, that's a fair reflection on my comments.

Once again, I want to underscore it is not in any way a comment on either the visibility that we have in our business inherently or on the economic conditions or on the soundness of our business.

The fourth quarter is just very volatile because everyone throughout the world, at least in the northern hemisphere is taking summer holidays.

And so it's a bit unpredictable in terms of how much vacation or holiday people will take and how revenues will materialize during the quarter.

But Greg, I think your interpretation is a fair one.

Okay.

And you know, we have only have a few months of data here, but we saw SAP pre-announced yesterday.

Of course, the corporate distractions about accounting and all that other stuff.

Is there any way to look at June bookings and determine how much it was affected by the incrementally new issues?

They were not affected by the two issues you cited.

We were looking, as Joe mentioned, at a hand full of very nice out-sourcing contracts.

I think we see them going forward.

It's a question of timing.

Many of you have noted there is an inherent unpredict ability around weeks, not months, in terms of when we get these things signed and approved by our company's senior management, and often by their boards.

There's also a lag time in terms of - which is usually weeks, sometimes even months around when when we can announce the transactions.

Sometimes they involve, you know, complex labor and other issues that the potential client.

So we are very comfortable looking at the pipeline, as Joe described, which has been increasing pretty significantly, that, you know, one month as I mentioned does not make a trend here.

But certainly the two points you mentioned in terms of, I would say in general continued softness in the software business as well as, you know, as I described all the earnings pressures and now all the focus around accounting and governance, they certainly don't help expedite the flow of business or revenue growth.

One last question.

Feel free to dodge this one, but if the - on the tax issue, the Bermuda status, if Accenture were incorporated in the U.S., what would the tax rate be?

Well, I really can't comment on that, but as I mentioned, Greg, we are doing all the right contingency planning you would expect us to do.

At the same time I would like to underscore that the legislative process is always an evolving one, one that we are monitoring very carefully.

Once again, I would like to underscore what I said, that there is no material financial impact as we look at it.

So Joe and I are certainly part of monitoring these developments, but we are not unduly concerned here because, you know, first and for most, our position is one of, as you know, being a series of 47 country partnerships around the world.

Our situation and how we structured our company was not based on tax avoidance.

We have always been certainly happy to pay the proper amount of taxes on source income in all the countries in which we operate.

One last question, Harry.

What are the legislative bills we should be looking at?

There are all kinds of movements.

We want to look at the right things.

We are following all of them.

What is challenging, Greg, there are many of them.

There are also bills that can be attached to other forms of legislation.

You can certainly follow up with us if you would like.

We have a good catalog of them, but I certainly wouldn't want to give anything here over the call.

I don't think it's necessarily an exhaustive list of the legislation that might be contemplated.

But our folks in D.C. as well as our general counsel, Doug [Scrivner], are tracking all of them.

Thanks.

Thank you.

the next question is from David [Tobin] of Morgan Stanley.

Go ahead.

Thanks.

Couple questions.

First, could you walk us through the consulting and business transformation out-sourcing, demand trends that you see over the next six to twelve months?

If you could give us a sense by the major geographies in global market units?

Thanks.

David, I will be glad to do this.

This is Joe.

You know, as we look at it, and as I mentioned, the total number of opportunities, and we track, look closely at the management level, those that are over 100 million each.

We see, I guess, the trend we would say is it's pretty balanced between particularly the Americas and Europe on a geographical basis.

If you look at increasingly, we look - if you look at the business process out-sourcing space, out of our total pipeline at least half of it, approximately half of it is that versus applications management and IT.

And that, you know, give or take a few percentage points has been pretty consistent over the last three quarters in terms of how it is forming.

Particularly interesting are things around customer contacting information and the customer area.

We are looking at new kinds of models, business practices.

The EMC deal, for example, we are taking a lot of our expertise in managing profitable services business is and looking for companies whose historical core has been in a products business who are trying to manage a service business.

We view that as a unique type of venture for us.

Then, interestingly, if you look at this opportunity we have done with E-Bay, where we are going to be the connection to E-Bay for companies to provide asset liquidation capabilities.

That is basically, really out-sourcing the whole asset recovery liquidation process, which a lot of companies manage internally through bulk liquidators today.

We are looking at different processes to grow the micro surgery approach and looking at some of these very specific plays.

On an industry basis, a big part of our success has been in the communications and high-tech so far this year.

There's still a lot of pipeline that we have there.

Increasingly there's a growing pipeline in financial services.

That's probably been one of the biggest changes in terms of the, that we have seen over the last couple of quarters.

And that's a little bit of the general trends we see.

Will you expect the strength in the government business segment to continue?

What sort of pipeline trends are you seeing there?

Yes, we see very much good growth in government.

A lot of the things that we have done we think are very key to modernizing governments.

If you look at some of the - you know, we are now strongly in government in 22 countries around the world.

As governments try to modernize with some of our E government offerings.

We see that as a robust marketplace.

We are redeploying some of our manages to some of the other industries in order to capture some of that growth.

It's a fairly small part of our business today if you look at it.

A quick final question.

Harry, you talked with the SG and A earlier.

Assuming EPO becomes a rising part of your revenue, how would you reverse the trend toward sales and marketing growing significantly faster than overall revenue?

David, we are very comfortable.

That's why I mentioned as we detail in a couple weeks to you our budget, we are very confident that next fiscal year SG and A in total as a percentage of our revenues will decline significantly.

So we have, with this ramp up in transformational out-sourcing, have more selling expense.

I don't think that's going to be something that you should view as longer term.

Thank you.

Thank you.

Our next question is from Patrick [Burton] from Salomon Smith Barney.

Go ahead.

In terms of the management reshaping, does that indicate more of an offshore effort at the company?

Could you talk a little bit about your strategy there as we move forward?

Thanks.

Pat, it does not reflect anything relative to offshore.

I think as Joe described to our employees and also described to you, we really, to use a little bit of our internal jargon, we have always prided ourselves and we think one of our financial success factors is how we manage our pyramid of employees.

That is to say, you know, similar to your investor bank at Salomon Smith Barney, Pat, it's the ratio of people at different levels.

We carefully monitor people at a dozen or more pay levels and seniority levels throughout the firm, look at the type of work we have, look at this literally country by country.

We have by country an optimum mix or pyramid relative to the difference in seniority or pay level.

As I mentioned before, one hallmark also that we think has been our sound management on a business sense and financial sense historically and going forward here as well is as we approach each new fiscal year, we make sure that that pyramid is properly tuned.

So as you may recall, we had some very modest work force reductions last year.

Part of it last year was, I think, more the economic slow down issue at the time last year, but it was also due to tuning of our pyramid.

If you look at the recent quarters where we have had unusually low attrition at certain seniority levels, we are just addressing that issue to make sure that we can, you know, generate the type of operating cash flow and earnings that we feel a good business like ours should have.

Okay.

And then just an overall comment about offshore relative to the management reshaping?

Thanks.

We don't, what we have done is basically have a network of centers around the world.

We have them in many of our countries.

What we try to do is look at where the skill sets are to perform certain types of capabilities.

And have different locations around the world support a client if the skills are located in one country or another.

If you look at any number of these types of situations, it's often times an advantage to a client where we can offer this network of capabilities with the advance in tell communications and the skills around the world to bring together through the centers the right industry skills and capabilities.

We look at it more as bringing the right skills to the client wherever they need to be.

And also the issue of being able to provide somewhere in Accenture everywhere around the world the sun is always up, so we can provide 24 by seven types of coverage on projects where we need fast cycles.

That's how we look at the whole approach to the solutions, the solutions work force.

Thank you.

The next question comes from Ed [Casell] from Wachovia Securities.

Go ahead.

Could you clarify for me what was written in the press release, Harry, about reversal of prior bonuses.

Was that related totally to the people that were let go?

Or is that from a greater pool?

It is not related to the people who were let go.

I think to describe our system, Ed, I'm sorry if this will sound repetitive, but for those on the call who aren't familiar with our compensation structure, at the time of the IPO, our partners took a roughly 50 percent reduction in pay to generate the net income for Accenture, the public company.

Of that remaining 50 percent, 82 and a half percent is salary and 17 and a half percent is what we call quarterly variable compensation.

As I described in my comments, that quarterly variable compensation is paid out four quarters in a rears and is dependent on our making our very well defined management plan, which we socialize internally into our board of directors.

Should we exceed our management plan, we have the discretion to accrue an annual bonus for our partners and associate partners.

And what we disclosed in our press release as well as in our 10-Q, because we made the commitment to all of you that we want to be totally transparent on the annual bonus accrual as well as our quarterly variable compensation accruals.

We recognized more expense by $30 million we wanted to make sure you were aware of this.

The two items you mentioned are not connected.

But because in the third quarter and for the first nine months of the fiscal year to date, our achievement above management plan was lower.

The annual bonus amount is correspondingly reduced.

Thanks for clarifying.

Can you talk a little bit about the products and resources group?

I guess the 37 percent of total revenues and they seem to be decelerating.

Can you talk about trends that are going on there?

Yes.

You know, if you look at products, which includes automotive, industrial equipment, consumer goods and services retail, and also the pharmaceuticals business, the health and life sciences, generally okay in most of those, but some did fall off in the auto and industrial sectors, principally in the U.S.

Europe is trending down a little bit.

Also I would tell you, Europe products this past year had the strongest growth of any.

So we just looked at it and knew it could not continue at that pace.

If I might interject, Ed, actually products accelerated from the second quarter.

In the February quarter it was 1 percent growth.

In the May quarter it was 3 percent growth.

So I'm sorry, Joe, but I wanted to make sure we were clear on that.

The resources grew 11 percent in the February quarter and now it's 3 percent.

I want to comment, I was going to say, the major deceleration is resources.

That's been largely U.S. utilities, is where we have seen that.

Last question is on Australia.

There has been a lot of talk about clients bringing work back in house.

Could you talk a little bit about the Australia and New Zealand markets for us?

I don't know that that necessarily has anything to do with clients bringing work back in house.

The overall sector that we work in in Australia has been hit by the economy there, as well as we just look at how our other competitors are doing as well.

And that's a challenged area.

It changed pretty quickly.

We had - we hired quite a few people based on what we saw a couple of years ago in Australia.

It changed suddenly.

I don't know if I could attribute any kind of a secular trend or anything to it.

I would agree with Joe.

I think while you can look at economic liquidalty in Australia, it has been, Ed, a period over the last several years, because there are sort of fewer large global companies in Australia, you know, what has happened over the last several years in some of those large entities, quasi govern sovereigns, or sovereigns have out-sourced their IT environments, but it changes because the countries are generally smaller.

The growth profile for future business.

Great, thank you.

Our next question is from the line of Stephen [McCullum] of Merrill Lynch.

Please go ahead.

Harry, do I read you correctly, from view of the active cost reining in and cost actions, that you think you can make the $1.05 number next year even if you have flat no revenue growth?

Should we maybe start thinking now about something closer to around flat no revenue growth for next year?

Well, Steve, we are going to comment on where we think top line is on the 24th.

I don't want to preempt that.

But your comment is accurate.

I said for the foreseeable revenue and economic scenarios we could make that $1.05.

Certainly a flat revenue growth scenario is something that is entirely conceivable given all the uncertainties we see in the global economy as well as just the general developments we see in the media every day in terms of political events or other events around corporate governance and fiduciary duties.

So we are very comfortable with the $1.05.

I would also like to emphasize, Steve, that we have made the commitment last year that any expenses that we have relative to severance, we flow through the P and L. That was part of the disclosure that was referred to in the previous question.

And we feel comfortable that even factoring in what may or may not happen in the future relative to severance or other costs, that we will make the $1.05.

The only other question I have, Harry, is the pricing.

Has pricing environment in the industry taken another leg down over the last two or three months?

It looked like it was kind of stabilized earlier in the year.

Now it seems like it is declining again.

Have we gone another leg downward?

Steve, I think the way we would characterize it, it has been a very serious and depressed pricing environment over the course of the last several months.

I don't think we can differentiate any changes in the, you know, last couple months that things have gotten materially worse.

The pricing environment still is austere, as Joe described.

Great.

Thank you, Harry.

Our next question is from the line of Dirk [Gotti] from J.P. Morgan.

Go ahead.

For modeling purposes, we've gotten pieces along the way, but Harry, can you talk about each of the verticals and directionally whether we should expect those verticals, up, down, side wise, over the next quarter, or the quarter that we are currently in?

I would never comment, Dirk, and I don't think - the way I'll answer your question is that I don't think you'll see any dramatic shifts here.

I think all the discussion that Joe and I have given previously as well as on the most recent quarter is, you know, pretty germane or applicable.

Dirk, we have all of our operating group chief executives actually developing their plans and strategies as we speak and about to finalize those.

You would be better to be open with them and let them tell you what their more in depth knowledge about what they see in the different verticals.

That's how I would like to be able, and after we finish this in the next couple of weeks, to be able to describe it to you.

To follow up on some commentary about the public specter, it sounded as though you've seen some solid growth overseas as well as in the state and local - I think that's what I heard, correct me if I'm wrong there.

But can you talk about the mix of business in the public sector and where you see growth and where you see the pressure?

I think in general we are seeing very solid growth across the board.

And we have been focusing, as you know, on the top dozen major economies and their government sectors.

We don't see any dramatic changes counsel tri by country or within sectors.

We are looking at the quasi governments that we serve as well.

I think one of the reasons we are attractive to many governments is because we bring supply chain skills and others that have been build in the public sectors.

Governments are looking at those business practices.

It was interesting, I was with one of the major agency commissionerss in one country recently.

He said to me that, you know, in one of their parts of their business they have 70 percent of the work force basically working on administrative things and 30 percent serving the citizens.

What you see is a great opportunity to improve business processes through technology to serve citizens better.

So that's a lot of what some of the color of what's going on.

One last question.

You've talked on this call and previously about the plan to add 8,000 plus people net additions in the next year.

I wonder how that correlates to overall growth prospects.

I know you want to talk about growth in another week or so.

I'm trying to get at, is there a big difference between the revenue productivity and profit contribution from the types of individuals that you are planning to add versus those that are being reduced here?

Yes, there is.

If you look at - as we said, we will be reducing some at the executive level because of - if you really look, our attrition has been historically in the twelve, 14 percent range.

Now it's almost zero.

So a lot of it is that.

If you bring in entry level people, obviously you'll see the average revenue per hour, in margin hour, shift downward as part of that overall growth.

I don't want to misread the commentary here, but when I hear companies saying it is going to increase its head count by more than 10 percent, that sounds like a company that plans to grow.

Well, we do plan to grow.

You know, the way we've looked at this targeting exercise, we looked at the probability adjusted pipeline on the out-sourcing deals.

Our best estimate of when they will close, and what we think our size of our work force will be at the ends of the next fiscal year.

You know, we are not going to sit by and not go after every growth opportunity we can.

There is a significant adjustment of the structure of our work force to be respond to the market.

But we do plan to grow.

It will be in different areas than where we've done it before.

Thank you.

Thank you.

Our next question is from [Moshi Catri] from S.G.

Cowen Securities.

Please go ahead.

Just to be clear as to where the deferrals were in the month of June, were they mostly attributable to the out-sourcing area?

Yes, that's why I mentioned the out-sourcing bookings in June being just over $100 million.

In my view, that is aberrant but not a cause for concern because we are seeing stuff that is queued up.

As Joe mentioned, there are a few contracts which we anticipated signing that were just slower in materializing.

But that unpredict ability is nothing new.

It's just relative to unpredict ability around large deals.

Is there any way to elaborate on the size of the deals that were deferred?

I think not.

The proof in the pudding is, be patient, we are working these deals hard.

We will see what happens in the coming weeks and months.

Then looking at your telecom vertical, specifically can you give us a specific feel, if you have any significant exposure, some of the large players? Their names have been in the news these days.

Maybe work us through the process Accenture is taking from the potential exposure to these clients?

As we mentioned on the credit quality of all of our clients, not just in the telecom sector, some of you asked about our exposure to world come, which is very small from a receivables standpoint as well as a run rate revenue standpoint.

And we are looking at, you know, not just the telecom, but all the companies that are credit stressed these days and making sure we are properly managing receivables.

But we don't see any huge or significant exposures in clients that are, you know, very weak or near distress or in distress.

Thanks.

We have time for one question.

It will come from the line of Reese [Upidous] from Credit Suisse First Boston.

Please go ahead.

There is, with the [Monday Independence] on the horizon, can you talk a little bit about the effect that their auditor independent issue has had on your business over the last nine months since the Enron issues broke and what you are going to do to try to retain the business that you gained from that going forward?

We have been very consistent on that topic.

Both Joe and I have said that there would be only modest increases in our revenue because of all of the issues and concerns about auditor independence.

We have picked up some very good clients.

We are intending to expand our relationship with them.

But you know, the main reason why we have been, you know, relatively more conservative in terms of any sort of positive uplift from auditor independent is many times audit committees and boards decide not to give consulting business to an affiliate of their auditor.

They are choosing instead not to reaward that business to anyone.

Just reflecting the slower or more constrained business environment.

So I don't think from our standpoint that there is going to be any significant revenue up lift in the coming months.

At the same time we are delighted to pick up some clients here and we will make sure we serve them well.

Okay.

And can you give the operating cash flow of a year ago?

I know you weren't public at the time.

And then -

It's hard.

And we can follow up with you.

As those of you who know us and have looked at our prospectus, there are literally over a dozen pro form a adjustments relative to the partnership form and the transformation to the IPO.

We can work with you through that.

You would have to go through all the adjustments to make a reasonably sounds apples to apples comparison on operating cash flow.

Okay.

And lastly, can you just talk a little bit about the other income, the 13 million there, a little more specifically?

What that consisted of?

We are trying to look here, Reese.

We are not exactly sure what number you are talking about.

Other income in the quarter comes from our affiliates.

If you follow up, we can give you a breakdown of where that is coming from exactly.

Okay.

Good.

Great, thank you.

Okay.

Thanks and I do want to appreciate all of you for your ongoing support of Accenture.

As I said, we are focused on growth, but we also are continuing to manage our business cautiously.

And we believe we will emerge from these challenging times even stronger.

Thanks again for joining us.

Thank you, operator.

You're welcome.

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