埃森哲 (ACN) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Accenture second quarter fiscal year 2003 earnings teleconference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, you need to press 1 on your touch tone phone. You will hear a tone indicating that you have been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. Once again, when we go to the Q and A session, if you wish to ask a question, please press the 1 on your touch tone phone. If you should require operator assistance during the call, please press zero then star and an operator will assist you. As a reminder, this teleconference is being recorded. I would now like to turn your conference over to the managing partner of investor relations, Ms. Carol Meyer. Please go ahead, ma'am.

Thank you, Operator. And thank you, everyone for joining us. With me today are Joe Forehand, Accenture's Chairman and Chief Executive Officer and Harry You, our CFO.

We're pleased you're joining us today on our fiscal '03 second quarter earnings announcement, and by now, I hope you've had an opportunity to review the news release that we issued earlier this morning.

First, Joe will provide you with his comments on the current market conditions, our overall results and key priorities, and then Harry will speak to the detailed numbers and we'll 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, or net revenues, and some of the matters we will discuss on 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 material 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 formats (inaudible) filed with. SEC.

Accenture assumes no obligation to update the information presented on this call. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe provide useful information for investors. Beginning with today's call, we will post reconciliations to those measures to GAAP to the investor relations web site -- page of our web site at Accenture.com. So with that, let me turn it over to Joe.

Thank you, Carol, and good morning to all of you and I want to thank you for joining us. Let me begin with a high level review of our second quarter results. In a few minutes, Harry will discuss the financial details of the quarter.

Overall, our results are in line with expectations, and we're pleased with our performance. I think especially true taking into account the challenging economic geopolitical environment in which we continue to operate, and I want to say a special thank you to all the Accenture people around the world who've been so resilient in these challenging times.

With that, let me share a few highlights from the second quarter. Net revenues for the quarter were $2.83 billion, a decrease of 3% in U.S. dollars, and 9% in local currency over the same period last year. Diluted earnings per share for the quarter were 25 cents. This compares with 2 cents on a GAAP basis and 23 cents excluding investment write-downs in the same quarter last year which makes this an increase of 10% in EPS.

Operating income was $368 million, or 13% of net revenues, which is a 5% decrease compared with $388 million or13.3% of net revenues for the same period last year. Outsourcing revenues for the quarter increased 33%, accounting for $828 million of net revenues.

Outsourcing now represents 29% of our total revenues and continues to be an area that we see as a growth engine. Consulting revenues were approximately $2 billion, representing a decline of 15% from the second quarter of last year.

Geographically, revenues in Europe, the Middle East and Africa increased 2% in U.S. dollars and decreased 13% in local currency over the same quarter last year., reflecting the strength of the Euro and the British pound.

In the Americas, revenues decreased 9% in U.S. dollars and 6% in local currency, and revenues in Asia-Pacific increased 7% in U.S. dollars and were flat in local currency.

If we look across our five operating groups, government continued its solid performance this quarter with a 12% increase in revenues, due in large part to continued growth in North America and Western Europe. Communications and high-tech had another strong quarter with a 5% increase in revenues, due primarily to several large outsourcing contracts.

Financial services revenues decreased 5% for the quarter over the same period last year, mainly as a result of the continued impact of the economic downturn on the capital markets and insurance industries.

Products had a 10% revenue decline for the quarter, primarily due to reductions in activity in our retail industry group in Europe, and in several of the products industry groups in North America.

And finally, revenues in resources declined 12% for the quarter. Growth in our utilities industry grew partly offset, declinings in our chemical energy groups, we continue to be cautious with the difficult environments these industries are facing.

Turning to our new bookings, we had the second highest quarter ever with $4.75 billion in new bookings. This represents a 93% increase from the prior quarter, and a 27% decrease compared with the second quarter of last year, which was a record quarter of bookings. Primarily because of last year, we had two very large outsourcing contracts in Q2 of last year.

This quarter, new bookings were split almost evenly between consulting and outsourcing. We see the $2.4 billion of consulting new bookings as a very positive factor, and also we're pleased that 49% of our outsourcing new bookings were in business process outsourcing.

We continue to believe that BPO represents a significant growth opportunity for us. To give you a sense of the size of the wins we had during the second quarter, we finalized a 10-year nearly $1 billion agreement with BC Hydro. We had six other client wins over $100 million each, and a very good broad mix of other mid-sized wins.

Finally, as we have demonstrated consistently each quarter, we are strengthening our balance sheet, ending the quarter with $1.7 billion in cash. This is up $211 million from the last quarter, and for the six months ended February 28th, we've generated $612 million in operating cash flow.

Also total debt at the end of the quarter was $59 million, down slightly from the prior quarter.

Before I hand the call over to Harry, let me just share a few thoughts about what we see ahead. On the one hand, we certainly, like others, see some strong headwinds ahead of us. For example, if you look at economists in many of the world's larger economies, they've been revising economic growth projections downward. There is continued pressure on corporate earnings and debt overhang in many businesses are still reluctant to make major investment decisions. We see many governments facing budget pressures as well. There's still a depressed level of overall IT spending, and this certainly has had an impact.

We've also seen some modest influence over the past 30 days with the war as well as SARS, although the impact is difficult to quantify. Our assumption for the rest of the year, this fiscal year, is that the market will not hand us much in terms of demand improvement.

We have to continue to out perform our competitors and create our own demand to succeed. As you know, we are taking a number of work force actions in Q3 at senior levels to reshape our work force to reflect the mix of skills, we need to respond to the marketplace and execute our strategy, and Harry will cover the impact of this shortly.

On the positive side, however, the strong new bookings in Q2 are encouraging, especially in consulting. Our consulting and systems integration business appears to be stabilizing. While it will be difficult to predict when we will see overall top-line growth in consulting, we do believe we're getting to a point of less year over year contraction for the remainder of the year. And finally the larger opportunities we have that are over $1 million has been steady.

As I said, we're assuming the market will not hand us anything over the next few quarters, given that, we will continue our pattern of reduced spending. Also we will continue to refine our strategy to ensure that we remain ahead of our competitors. And we're aligning our leadership and organizational structure to these shifts in our strategy.

And on that last point, the management changes we made last month position us for future growth and reflect the continued evolution of our global business strategy. And I certainly believe these changes will strengthen our management team and our ability to take advantage of the opportunities of the marketplace as we continue to lead our industry.

Let me pause here and turn the call over to Harry to give you more details about our results.

Thank you, Joe. Let me elaborate on our results for the second quarter.

Diluted EPS for the second quarter were 25 cents, which compares to 2 cents on a GAAP basis, and 20 3 cents or 10% growth excluding investment write-downs for the same quarter last year. Diluted EPS came out ahead of the current analyst consensus estimate for the quarter of 24 cents per share.

Net revenue for the second quarter totaled 2.83 billion, a decline of 3% in U.S. dollars and 9% in local currency over the same period last year. Absent the consolidation of Avanade in January 2002 and Accenture HR services on March 1, 2002, net revenues declined 4% in U.S. dollars.

Revenues for Avanade were 22 million in the second quarter 2003 and 7 million for the partial second quarter of 2002. Revenues for Accenture HR services were 29 million in the second quarter of 2003.

After Q3 of this year, we will no longer breakout the effect of consolidating Avanade and Accenture HR services since they will have been part of Accenture's results for one full year.

Operating income to the second quarter was 368 million, or 13.0% of revenue, a decline of 5%from the same quarter last year, which totaled 388 million or 13.3% of net revenues.

Cost of services before reimbursable expenses totaled 1,817,000,000 or 64% of net revenue, an increase of 109 million over the same period last year, due to increased outsourcing costs, partially offset by lower variable compensation expenses.

Although we continue to make progress on our cost reduction efforts, we are still focused on delivering more cost efficiencies in the last half of the fiscal year. In the second quarter this fiscal year alone, similar to the first quarter, we have reduced payroll roughly 160 million relative to the second quarter of last year. As I mentioned last quarter, our non-payroll expenses primarily related to new outsourcing contracts have increased substantially over the same period with our growing outsourcing revenue and have offset the vast majority of the consulting payroll savings.

SG&A for the second quarter totaled 642 million, or 22.7% of net revenue, a decrease of 175 million over the same quarter last year.

In particular, let me comment on our general and administrative spending for the quarter, which significantly contributed to the SG&A decline, decreasing 146 million to 9.6% of revenue, compared to 14.3% of revenue for the second quarter of last year.

The SG&A decrease reflects the effects of our cost management efforts with lower geographic facility and technology costs, lower bad debt expense of 41 million, and lower corporate and administrative spending.

Although we continue to actively manage our cost structure and many of these reductions are sustainable, we do not expect the entire level of cost reductions realized during the second quarter to continue throughout the remainder of the fiscal year with regard to non-recurring items like bad debt expense.

Also, we do not expense any variable compensation in the second quarter, although we did not significantly reverse any historic accrual. As a result of the one-time charge we took in the fourth quarter of fiscal year 2002,related to the restructuring of our real estate, operating expenses for the second quarter were 8 million less than they would have been otherwise.

We will continue to give you visibility on the economic benefits of the real estate charge, although I caution that these benefits would decrease over time as the lease obligations expire.

We realize 27 million of other income, an increase of 18 million over the same period last year, reflecting favorable foreign currency gains from the devaluation of the U.S. dollar compared to the Euro. As a result, income before minority interest totaled $250 million, up $14 million when compared to $236 million excluding investment write-down for the second quarter of last year.

Again this quarter, as highlighted in our earnings release, we are providing you, our public partners and shareholders, with calculations for core earnings as formulated by Standard & Poor's. The core earnings calculations are very close to how we manage our internal P & L's to drive our business.

The S&P core earnings calculation principally reflects adjustments to add back majority interests, includes stock options and related compensation expense, and excludes non-operational items such as net losses on investment.

Accenture's core earnings were $208 million, or 21 cents per fully diluted share for the second quarter, compared to 180 million, or 17 cents per fully diluted share for the second quarter of last year. Accenture's core earnings per share of 21 cents compare with reported fully diluted earnings per share of 25 cents, reflecting primarily the impact of stock options in the employee share purchase plan.

Our outsourcing business grew 33% for the quarter, primarily due to strong outsourcing growth in the communications and high-tech, government, and resources operating group. While our technology infrastructure outsourcing business grew at 19% and the business application outsourcing business grew at 11%, we continue to realize significant growth from our business process outsourcing business, which grew over 150% from the second quarter of last year.

We are focused on continuing to take precedent-laden first-time market share in the important emerging transformational BPO arena.

Consulting, which includes system integration, declined by 15% over the second quarter of last year, as all of our operating groups with the exception of government experienced continued declines in consulting revenues over the second quarter of last year.

We experienced a slight dip in our consulting revenues in the second quarter, compared to the 13% decline in the first quarter, and we continue to monitor our consulting business closely.

Favorable foreign exchange impacts in the current period were offset by some favorable contract adjustments that occurred in consulting during the second quarter of last year.

Our government operating group rebounded from Q1 to grow by double digits again to 12% in the second quarter, primarily due to 46% growth in outsourcing contracts, primarily in North America and Western Europe, and single digit growth in consulting over the same quarter last year.

Our government operating group remains confident in continuing their growth in the double digits for the remainder of this fiscal year.

Communications and high-tech grew 5% due to solid growth of 67% in outsourcing. Financial services declined by 5%, which is a smaller percentage decline than in the fourth quarter of fiscal 02 and the first quarter of fiscal 03.

Products and resources continue to contract this quarter, with revenue declines of 10% and 12% respectively over the same quarter last year. Also this quarter, we experienced significant effects from exchange rate movement. Revenue growth in Europe increased by 2% in U.S. dollars in the second quarter, but declined 13% in local currency due to the weakening of the U.S. dollar against the Euro and British Pound.

The Euro's relative strength against the U.S. dollar is having the greatest impact on our European growth since over half of all revenue generated in our European business is denominated in the Euro. European revenues were primarily impacted by foreign currency movements year on year with revenue declines in the UK of 17% in local currency and 6% in U.S. dollars, declines in Germany of 16% in local currency and1% in U.S. dollars, declines in Spain of 7% in local currency, yet growth of 9% in U.S. dollars, and both France and Italy had declines of 10% in local currency, yet growth of 6% in U.S. dollars. Most notably, we expect the U.K. to return to growth in U.S. dollar terms in the fourth quarter.

The Asia-Pacific region posted growth of 7% in U.S. dollars and flat growth in local currency for the second quarter this fiscal year, also due to the weakening of the U.S. dollar primarily in Australia, Japan and Korea.

This is an improvement over the 6% decline in U.S. dollars in the first quarter of fiscal 2003, and the 16% decline in the fourth quarter of fiscal 2002.

Our Asian markets continue to experience increased competitive pressures with the exception of Japan, which reported revenue growth of 24% in U.S. dollars and 16% in local currency over last year. The constraints on travel in Asia will, however, have a small negative impact on our Asian business we expect.

Finally, our Americas region experienced a 9% decline in U.S. dollars this quarter, or 6% decline in local currency. Growth in this region has been impacted by the strengthening of the U.S. dollar against the Mexican peso, the Argentinean peso, and the Brazilian real.

This impact was partially offset by the weakening of the U.S. dollar against the Canadian dollar. Contributing to the Americas performance this quarter is the 7% revenue decline in the U.S. We are seeing further slowdowns in the U.S. chemicals and energy sectors, as well as in many of our U.S. product sectors including U.S. transportation, health services, and retail.

Chargeability continues to be in the high 70's,with notable improvements over last quarter in Canada, France, the Nordic region, Spain, and Portugal, offsetting a decline in the U.S.

New bookings, as Joe mentioned, for the second quarter were 4.75 billion, a 93% increase over the first quarter of fiscal 2003. This represents the second highest sales quarter in the company's history, second only to the second quarter of fiscal year 2002, when we booked several large transformational outsourcing contracts.

We saw strong sales in both our consulting and outsourcing businesses with roughly a 50/50 split of the total bookings this quarter.

Consulting new bookings totaled 2.4 billion, a decline of 10% over the same quarter last year, although at a markedly lower rate of decline than the first quarter and fourth quarter consulting new booking.

Consulting new bookings this February are at the highest levels in a year. Outsourcing new bookings totaled 2.3 billion, a decline of 38% over the same period last year because of, once again, the outsourcing mega contracts that were signed last year.

Of the 2.3 billion in outsourcing new bookings, 49% were in our BPO business, followed by 39% in business application outsourcing, and 12% in technology infrastructure outsourcing. Geographically, 60% of the new bookings were in the Americas, 35% were in Europe, Middle East and Africa, and 5% were in Asia-Pacific. We expect to finish the month of April with our fourth straight month of 1 billion plus in booking.

On the revenue front, we cautiously see some continued improvement in March. Total revenues in March grew 7% in U.S. dollars, and declined by approximately 1.5% in local currency. Consulting revenues in March declined 2%, while outsourcing revenues grew 36% over March 2002.

Consulting revenues per network day are continuing to slowly increase. Our pipeline, which is a collection of subjective estimates of opportunities with a win probability equal to or greater than 70% is up 16% over the same quarter last year.

Our days to close in the second quarter was 175 days, which compares to 248 days to close a year ago. As Joe said, our balance sheet remains exceptionally strong, with cash totaling close to 1.7 billion and debt of only 59 million at the end of February.

Operating cash flow for the quarter was 414 million, primarily driven from strong income generation for the quarter and favorable working capital movement. This compares to 453 million of operating cash flow for the second quarter of fiscal 2002.

Within working capital, our unbilled services and client receivables increased 21 million over February, while deferred revenue increased 109 million over the same period.

In addition, the non-current portion of our client financing arrangements totaled 121 million, and this is, once again, the long-term capital required to run our long-term outsourcing contracts, and this represents an increase of 15 million from August, but a decrease of 11 million from November.

As I mentioned observe on our call in January, we are including this activity in the DSO calculation. DSO's total 48 days for the quarter, still well ahead of virtually all of our competitors. Excluding the effects of the non-current customer financing, DSO's totaled 45 days and were one day better than the comparable August DSO of 46 days.

Our total non-investment grade inventory and receivables balances from our top two hundred clients totaled 85 million in February 2003, down 13 million from 98 million at November, and up 23 million from August.

Of these receivables, only 38 million are over one month in age.

We continue to be diligent in monitoring our clients' credit quality and do not see an increase in risk of our receivables portfolio, and perhaps actually a decline in overall risk profile. Free cash flow for the quarter net of 60 million in capital expenditures was $354 million.

As I commented on our last call, although we continue to be frugal in property plan and equipment expenditures and the use of capital for transformational outsourcing, our capital expending for the quarter returned to a more normal level due to our commitment of investing and delivery center facilities as well as traditional technology equipment such as PC's.

We expect cap-ex for the fiscal year to end up at about $225 million. On a six-month fiscal year to date basis, operating cash flow was 612 million, compared to 256 million for the six months ended fiscal 2002.

Free cash flow for the same period totaled 533 million, compared to 165 million for the first half of last fiscal year. We remain confident in our full-year target of 1 billion in free cash flow, or $1 per share of free cash flow.

Additionally, our credit ratios and returns continue to be strong with return on invested capital of 66% for the quarter and total debt-to-total-capital ratio of 4% as compared to the year-ago ratio of 17%.

Our EVA or Economic Value Added was 9% of revenue this quarter, a 7%decline over the same period last year.

On the share management front this quarter, our share employee compensation trust repurchased 845,000 shares for approximately 14 million for the three-month period ended February 2003.

In February, our board approved an additional150 million of funding for the trust, which was funded in March. We expect to begin utilizing some of the shares repurchased by the trust in the near future to satisfy outstanding employee share awards in a tax-efficient manner.

In the first two months of the second fiscal quarter, we concluded our second quarterly liquidity opportunity with partners holding Accenture limited shares being able to sell 1.7 million in brokered transactions. In March, we purchased or redeemed 5.7 million shares from the Accenture SDA shareholders and purchased 59,000 Accenture Canada holding exchangeable shares for total cash outlay of 94 million.

As I said on our last earnings call, we reacquired these SCA shares because of constraints in our legal and tax structure. For the quarter, the weighted average diluted shares outstanding is 997.8 million compared to 1.001 billion shares at November 2002, and 1.035 billion shares for the same period last year. We remain committed to our public shareholders and partners not to be significantly diluted -- dilutive, excuse me, if our financial performance does not warrant it.

I also want to reiterate that how we address the share overhang associated with our partner shares is very important to all of us, so we want to keep you up to date on our intent and related developments. Very simply, we want to affirm all our prior statements about the partner share management program.

For investors, it means that we intend to continue to limit the number and frequency of potential share sales to ensure an orderly trading market. For our partners, it means that we intend to continue to facilitate share liquidity, consistent with maintaining discipline in the market.

Specifically as we've said all along, the largest (inaudible) shares coming off the transfer restrictions of our voting agreement will occur in 2003.

In July of this year, and at the anniversary date of our IPO, an additional 143 million shares will be free of those restrictions. However, as you know, the vast majority of these shares held by partners and former partners who signed the common agreement will not be free to hit the market because they will continue to be subject to the restrictions of the share management plan. The share management plan gives management the ability to decide how the shares will be sold into the market.

I want to affirm the principles under which sales will take place. First, it is our intention to sell stock through organized transactions. We do not intend to do more than one fully marketed transaction per year. However, it is conceivable that in some years, we may not do any transactions or, conversely, do two of these transactions as a result of market conditions and partner liquidity needs.

We will continue with our quarterly opportunities in the same way as we have in the past two quarters, but going forward, we would expect these amounts to be limited by reference to the increasing volumes permitted under rule 144.

Finally, we will continue to engage in share repurchases to offset shares issued under share incentive programs or to facilitate partner liquidity needs at prices at which the company believes are attractive. On accumulative basis over time and calculated on cash amounts, we will repurchase shares in a pro rata fashion between our public shareholders and our partners.

We want our public shareholders to have proportionate treatment relative to our balance sheet.

In summary, we want to use our share management program to increase the liquidity of the stock in the market, but we do not want to do so at the risk of jeopardizing orderly dispositions of the shares. I also want to provide you with a report from our board of directors meeting last week regarding some of our future actions for partner share management.

Our board approved the filing of a shelf registration statement with the SEC later this week that will permit us to register 100 million shares. That is the number of shares we think will be sufficient to provide flexibility for a secondary offering as well as other share management program transactions as market conditions and as our business performance in the future may allow.

As I've detailed previously, we will only embark on a secondary offering when we in senior management believe our business and financial results will show sustainable strength subsequent to a potential offering.

Let me turn now to our head count. Our current head count stands at approximately 76,300, of which 67,400 are billable and 8900 are support personnel. We are now up to 7700 personnel in our solutions work force, and it is becoming apparent that we will significantly exceed the 10,000 target we have stated to you previously. We will probably end up at between 12,000 to 13,000solutions personnel by August 31, 2003.

Our lower cost solutions work force is operating between 83 to 85% chargeability, and is showing robust demand. Recruits are also very attracted to working for Accenture, as they believe we will be long-term winner in the global IT services industry.

Unlike those who are come from a one country platform, we already have abase of low cost developed economy centers spearheaded by strong relationship partners who have a senior executive dialog with the global 1000, and, unlike those companies trying to expand from developed country (ph), we have worked under common methodologies in geographies around the world for over a decade.

Our pricing and margin trends also show this. In March, net fees per hour as well as revenues per network day increased over March of last year with gross margin percentages being virtually identical. Because of our high value-added offering, we will be impacted much less than others in developed economies on general bill rate trends, but because of our growing scale in our solutions work force, we will take share and margin from those who have a one-country model that is increasingly using costly acquisitions to try to get to scale and to artificially induce relationship presence.

Also let me follow up on a comment that Joe mentioned regarding some personnel actions we took recently to reshape our global work force. The combination of low attrition at the executive levels in our consulting work force coupled with the slowing of our consulting business resulted in a situation where we had too many people at the more senior levels. As a result, we are reshaping our workforce with a reduction of approximately 1% of our people, primarily at the executive level, in the U.S. and U.K.

The third quarter results will reflect a severance expense of approximately 88 million, which will be offset by 28 million of third quarter payroll savings with a net cost of our P&L of approximately $60 million. The fourth quarter P&L payroll savings is estimated between 50 and $60 million. As we've done in the past, we will flow through all severance costs through our income statement.

Finally, on guidance for the current quarter, we expect revenues to be between the range of negative 2% and positive 2% growth over the third quarter of last year, and we expect to earn between 24 cents and 26 cents per share with the severance impact I detailed would above. We expect EPS for the full fiscal year between 98 cents to $1.05, and we continue to target EPS of $1.05.

We will provide our formal guidance on Q4 on our July earnings call, but you can infer from the previous numbers that Q4 EPS would be between 22 and 27 cents. We also continue to target zero to 2% revenue growth for fiscal year 2003.

With our guidance, we want to demonstrate not only our caution with the inherent volatility in the geopolitical and economic environment and its possible impact on our near-term consulting business, but also the bottom-line exposure that we face because of foreign exchange rate volatility and the constraints on travel in Asia.

In the calendar year so far, we have seen improvement in our consulting business, but we remain cautious on whether there might be a delayed impact on consulting revenues because of corporate earnings weakness or the lagging impact of client perception about the Middle East situation.

All in all, our senior management team is extremely proud of the hard work and strong performance that our colleagues have produced in the second quarter. While the road ahead is still challenging and we will have to continue with strenuous cost management efforts for the rest of the fiscal year, I am confident that we will continue to deliver industry-leading earnings and cash flow results.

Our sales efforts are showing some renewed momentum, and we believe that our overall growth strategy is one which we are uniquely positioned for and which can deliver superior long-term results. With many of the storm clouds we have worked through in the past seemingly receding, we have a medium-term optimism that is in addition to our unmatched belief in ourselves and faith in Accenture as a global IT services leader.

Operator, can you please open it up for questions?

Thank you. Once again, ladies and gentlemen, if you do have a question or a comment, please press the 1 on your touch tone phone at this time. And the first line we'll open is the line of David Togate (ph) at Morgan Stanley. Please go ahead.

Thank you. Joe and Harry, could you discuss the impact of the growth of the outsourcing business on your gross margin? You've had rapid growth in this business historically, but this seems to be the first quarter we've seen significant pressure on gross margin.

Yeah, I think, David, that has certainly been the case. I think what we're trying to balance is the growth in market share which we'd like to achieve on some of these precedent-setting transactions along with investments we want to make in some of the key services offerings that are entailed in our BPO offering with the pressures and the balance of making our financial targets. And I think we feel comfortable that we can continue to make our financial targets, at the same time not hesitate one bit relative to being aggressive about taking some important BPO market share.

Should we assume, then, that 35% gross margin is more indicative of what we'll see going forward?

I think, David, you know, one quarter doesn't a trend make, but it's probably, you know, the best, you know, point estimate of where gross margins may be in the future, yes.

And just a quick final question on billing rates, what were they in the quarter?

Why don't we follow up with you on the detail. We'll give you the -- we can give you the gross and net billing rate data, you know, for March, which I referred to in my comments, as well as for the quarter. But, you know, most important, there's actually a slight increase year over year, and I think importantly relative to all the commentary that people have been making in terms of the commoditization of the low end of the systems integration market that, has not impacted us from a margin perspective.

Thank you.

Thank you.

Thank you. The next line we'll open is the line of Adam Fritche at UBS Warburg. Go ahead.

Thanks, and good morning. Harry, if you wanted to buy back shares that were eligible from the partners this year, did you have to file a shelf in order to do that, or is that separate?

Technically speaking, and, yes, we do have to, of course, comply, Adam, by SEC tender offer rules, and it is for our repurchase of SCA shares, we do not need a shelf, but in all likelihood, it is more efficacious for us to sell a corresponding amount of limited shares to enable this repurchase, and having the shelf enables the more modest sale of the limited shares, but we are exploring how -- you know, with the tender offer rules and framework we might repurchase all of the shares. But your question is technically an astute one or legally an astute one. We do need the shelf at this point to enable repurchase.

Ok. So should we take that shelf offering as you're doing a secondary, or it gives you kind of a license to buy back a larger number of shares than maybe were otherwise possible on the quarterly windows that we're seeing? Is that the way we should look at it in

It's really both, Adam. I think, you know, given the volatility in the market, I think first and foremost, we want the shelf to be prepared. If market conditions are favorable, and if, you know, we have strong confidence in our business trajectory. And so we want to make sure that, you know, we have the capability to go forward when there might be a favorable window in the future to do a secondary offering.

Ok. On the guidance front, what made you introduce an EPS range with your prior guidance being the best case scenario after coming in with a bookings number that was so strong?

Well, I think as I mentioned, Adam, you know, Joe and I, we've been suitably conservative in the past, and I also hasten to add we've been appropriately conservative in the past, and I think some of the trend that Joe described as well as the general data points I mentioned in terms of some of the volatility we may face as a result of foreign exchange, as a result of what might be a delayed impact on Iraq, although we did not see anything, you know, materially so far in the first three months of the calendar year, as well as potentially, you know, impacts as Joe described are very hard to quantify, hard to foresee relative to the situation in Asia, I think because of that, we wanted to make sure now that we have a little over half of the year done, that would you have an update in terms of the full range of outcomes that we might expect for the year. But, you know, once again, as I mentioned in our comments, we continue to target $1.05, but it's, you know, not going to be achieved without continued strenuous cost management efforts, and as you're correctly alluding or pointing out, we'll need to show another couple months of good bookings and also hopefully get through some of the final issues of volatility or downside risks that, you know, still remain out there in the economic environment and the IT services environment.

I might add, if you really look at the economic growth rates that are being revised downward inmost of the major economies, if you look at corporate earnings patterns and also just the overall level of IT spending, you look at those three factors, it's becoming apparent that at least over the next couple, three quarters, it's hard to see an overall demand pick up, and what we get is largely going to have to be by outperforming, so we wanted to be suitably conservative.

Ok. Last question here. Harry, how much of the other income did you see going into the quarter? Was that something that kind of just happened during the quarter or were you able to plan for that and maybe do some more cost-cutting and so forth around that visibility? How should we look at that on a quarter by quarter basis?

It really is something, Adam, we only have visibility on month to month because, as I mentioned, the other income windfall, so to speak, for lack of a better term, came primarily from the weakness of the dollar, and I think we are generally, as I've described before, very conservative in terms of generally not being aggressively active in hedging foreign exchange exposure because I think over a several-year period, we've seen this all balance out, so we prefer not to make any near-term bets on foreign exchange movement, and so, you know, you will see as you saw last quarter if there's a spike in terms of non-dollar exchange rates, that we'll have some meaningful movements in other income.

But they're very difficult to plan for, and I think what we've seen, once again, getting to your earlier question on, you know, our being conservative about the EPS for the rest of the year is, you know, the volatility in the foreign exchange market is at an unprecedented high level right now.

Ok. Thanks, guys.

Thank you.

Thank you. The next line we'll open is the line of Greg Gould (ph) at Goldman Sachs. Please go ahead.

Thanks. Harry and Joe, on the solutions workforce, the target is now 12 to 13,000. Where is the upside coming from? Is it from more hiring or the reassignment of existing employees into those solution centers?

When you say "the up side," be more specific.

Oh. I think the original target for people in the solutions centers was 10,000, right?

(inaudible) Well, we found that we're able to scale very rapidly. If you look at our ability to be able to use our methodology on a global basis and be able to link our delivery centers around the world with our client teams and our ability to be able to get our solutions work force up to the mid 80's in terms of utilization rates, right now we believe we can continue to scale that, you know, based on the demand that we see.

Is it -- are you reassigning existing Accenture employees? Is that where the increase in that forecast is coming from, or is it hiring more people?

It's hiring more people.

Ok. Now, secondly, on free cash flow, Harry, halfway through the year, you're running at an annualized rate of 1.2 billion, right? Would there be anything that would take you off course in the second half of the year? I know you said the target is 1.0 billion, but do you foresee anything that would make you not come in at the1.2 billion at this point?

Well, free cash flow, Greg, is probably running -- I'm not being too fine with the numbers -- I think is running at about1.06 billion. Operating cash flow is at the number you described.

Ok.

And I think given the range of what we described for EPS, we should make the billion dollars in free cash flow.

Greg Gould Ok. And one last question. On the bookings for consulting, how did it trend during the quarter? You don't have to give specific numbers, I know you don't do that but was a particularly back end or front end loaded?

It was weighted toward the back end.

Ok.

So it strengthened December to January, January to February.

Ok. Thank you.

Thank you.

Thank you. The next line we'll open is the line of John Jones with Soundview (ph) Technology. Please go ahead.

Thanks. Joe, would you talk about the partners' commitment to the variable - to basically giving up their variable compensation and how long they're willing to do that to keep operating margins at the levels they're at?

Well, our partners agreed with the variable compensation program that we put forward. If you really look, it was always the way we had operated our business as a partnership where it was -- as a partnership, it was all variable, and so you know, as a part of the -- it's a part of the commitment we've made, and we want to be able to get our business to the point as we look forward where we can get back to growth pattern and be able to get that variable compensation delivered. But I think our organization understood the overall dynamics of the plan and how we were operating in a very tough environment.

John, I'd add, you know, our partners and all our employees for that matter are very significant shareholders, so I think as you've seen in recent quarters, people have the strength to go forward with the tough cost management actions and persevere through this downturn.

And I guess the question I'm asking is, if this continues into fiscal 04, will we see the similar commitment?

Well, we always are going to look first and foremost is our compensation at or above our competitors', because we want to be sure that we are (audio gap) on a comp basis that we continue to attract the very best people, and our ability to attract a number of people from the marketplace and bring them in as partners I think is evidence that our compensation is still at or above the industry. So that's the key benchmark we look at in terms of making sure that overall compensation is at the right level.

I think, John, you know, how we're looking at it, and this does not, I would admit, directly answer your question, but what we're trying to do is make sure that we can continue to retool our cost structure so that, you know, we can provide our partners with superior compensation. I think that's what we look at first, and that should hopefully help us in the future here.

Just a couple of clarifications. The Wyeth (ph) and BC Hydro deal (ph)

BC Hydro was in the bookings and the Wyeth deal is in the third quarter and the amount for Wyeth is undisclosed.

All right. And your head count basically, if I listened to in numbers correctly with your solutions work force, your head count is going to up from76,300 to almost 80,000 by August. My question is, are you going to have to do a work force re-balancing here in the U.S. if you hit your12,000-ish number in your solutions work force?

We don't anticipate any further restructuring. As you look the a what we've been doing to adjust our business model, we had an issue with a lot less attrition than normal, especially at the more senior levels, and if you look at the overall economics of our business, the margin, the mix of work between solution consulting and outsourcing, we think we've got it where we need to at this point, so we don't see that there should be that issue.

Great. Thank you.

Thank you. The next line we'll open is the line of Dirk Gossey (ph) at J.P. Morgan. Please go ahead.

Yes, thank you. Good morning, guys. Looking at the public sector component of the business, looks like it continues to do fairly well here. Can you talk a little bit about the mix of business within the public sector and also the type of work that you're doing in that sector that's driving the performance?

If you look over the last, you know, six to nine months, there's been a tremendous growth in the U.S., both at the federal level and the state level. A lot of that has been a lot of the work around E-government, a lot of the work in terms of citizen-supported services, work in the procurement area, some of those areas, so we've continued to do well in growing our mix of work at the federal level around more agencies than we've worked in the past, including defense, and then you look most recently, we've seen some pickup, particularly in western Europe around some of the government wins we've had there, so that's largely -- and we haven't see (ph) -- even in spite of some of the state budget pressures, we haven't seen a huge impact of that yet in terms of overall performance at the state level within the U.S

Harry, just, I guess, a follow-up. Is there an approximate kind of mix of business that you can talk to in terms of the domestic versus international component of that public sector, and then maybe looking at the U.S. component, state and local versus federal?

We're shy of half of U.S. versus non-U.S. and state and local versus federal sort of splits up that piece of the U.S. by roughly equally.

Ok. Great. Second question here, a lot of discussion recently about the off-shore pricing and demand environment. Can you talk about any specific impacts on your business in the February quarter, for example, did that contribute at all to the compression in the gross margins in the quarter? And your thoughts on the influence of these factors in your second half fiscal '03 guidance.

As I mentioned, Dirk, just looking at the consulting, net bill rates of the consulting revenue, net revenue per work day or looking at the consulting gross margins, there has not been any impact of the off shore, and this does not factor in relative to the issues Joe he did described that we're cautious about in the second half as well as the issues I described.

Last question here. Given the outsourcing bookings to date and what you see in the pipeline you could close on and begin to deliver on through the end of the fiscal year, could you comment on the visibility you see at this point in terms of being able to sustain the type of growth that you've been seeing recently in that business over the second half of the fiscal year?

Well, I think, Dirk, we have excellent prospects, but, you know, given the environment in Uslo (ph) these days, we unfortunately have to be cautious on that one as well because these big deals are volatile in terms of our ability to close them. I think in terms of -- Tuesdays close material improvement over Q4 and Q1, but it's really something you just can't extrapolate forward. It's really deal by deal, client by client, and every client has idiosyncratic issues or since sensitivities that we have to work through and they have to work through. So on the good side as we described relative to the communities both Joe and I feel we have some excellent prospects here for the next couple quarters and for the next year as well.

We went into the February quarter with kind of a target of 4 to 5 billion and certainly you did well against that. Is there kind of a reasonable range that you'd like to comment here on relative to the May quarter?

No, I think I made a comment in terms of, you know, March and April and where they fell, but I don't think we're going to make an overall prediction on bookings, but that, you know, once again, does not indicate in any way our lack of confidence in the opportunities that are out there. I think we'll just do our very best and utmost to close as quickly but also as prudently as we can here.

Ok. Understood. Thank you.

Thank you. The next line we'll open is the line of Mowsha Katri (ph) at S.G. Cowen. Please go ahead.

Good morning. A couple questions on your bid and proposal pipeline. In the past, you've provided some granularity on the various deals that you had in the pipeline. Maybe you talk about the top 10 deals, their value, et cetera. Can you talk about that a little bit, and then in the same context, Harry, maybe you can talk also about sell cycles and transformation outsourcing. Have we seen any material change, not year over year but maybe on a sequential basis? Thanks.

Well, I think the sell cycles, Mowsha, really depend on the type of client and the type of work. What we've emphasized to all of you in the past and it continues to hold true, most of the deals we're signing continue to be new precedenting deals not only for us but also for the client, and so as a result, it tends to take longer. I think sometimes we just have more success and sometimes the senior management at a particular client can more rapidly move through the outsourcing agenda, at other times there may be other issues that, you know, can cause some constraints or timing issues. You know, I think looking at your first part of your question in terms of composition of deals, it's very similar to what we've had. There are over 100 opportunities that are greater than100 million in the pipeline, and I think the number of billion-plus deals is comparable to what we've described to you in the past. I think what I would say, and I think Joe probably will comment, what we're also seeing is we're starting to see the second and third round of some different types of deals which, you know, we're very excited about. So we're seeing some successor transactions to transactions we've previously announced, and I think that's going to be helpful because it will mean that we can have some opportunities for economies of scale and scope.

And then, Harry, you're cautious about the consulting business, especially in this environment is definitely warranted, but so far, have you seen any -- throughout the February quarter, have we seen any cancellations or deferrals in signings, or have we seen anything like that so far since the end of the quarter, and then finally, maybe you haven't spoken about this a lot during this call, have we seen anything materially different in Europe compared to the last quarter or two?

We think in terms of just looking on a two-week basis, but we're still cautious, and I think all of you are very cognizant of our business, but if you look at two-week periods, we have a steady increase in net revenue per work day in our consulting business going through the end of March, and that's not to say that the trend may continue. I mean, the last two weeks of March don't even begin to encompass what happened in Iraq, which, you know, took place in that period, although I'm sure that there was an anticipation of that, and Mowsha, what's the second part of your question?

Just talking about demand trends in Europe. Have we seen anything materially different in terms of of demand trends compared to where we were a quarter before, maybe two quarters ago?

Not really. I don't think we see any material differences in where we were last quarter, and I think if you look -- just adding on Harry's point, if you look at the strength of the 2.4 billion in consulting sales we had in Q2 and you look at that on a -- you know, that's an average of 800 a month of new sales versus a run rate per month of in the mid 600 millions, then you're going to see the effect of the Q2 sales in terms of some bump-up in the consulting revenue rate that we're seeing, starting to see in the early part of Q3, and so that's the encouraging sign. But there is still just a lot of caution in terms of just trying to understand where sales are going to be as we look in Q3 and Q4 just given some of the uncertainty we see in the world.

Thanks a lot.

Thank you.

Thank you. The next line we'll open is the line of Andrew Steinerman at Bear Stearns. Please go ahead.

Hi. Harry, when you look through all your previously identified cost savings which you were great at highlighting for us last summer at Analysts' Day, at this point, how much of those previously identified core savings do you think we've used up, and keeping in mind you're - your attention to use those cost levers in the rest of 2003, are we going to have cost savings available for us in fiscal 2004?

I think, Andrew, we have used some of the cost savings in 03. We've made some notable progress if you can see in the last quarter's result, I think we're, you know, continuing as Joe and I described really diligently focus on cost management. Unfortunately we're going to have to keep it doing the rest of the fiscal year, and I think for next year, the opportunities are there, but, you know, they are not limit less - limitless opportunities. We are slowly and steadily depleting those opportunities, but I think when you look at our SG&A levels, we still have good potential here not only for the rest of the fiscal year, but probably on a lesser level still good potential next fiscal year.

Right. And do have you a percentage of how much we've used up so far?

No, I haven't thought of it that way. I'd be happy if you called back to work through it for you, if you'd like.

Ok. Appreciate the comments. Thank you.

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

Thank you. The next line we'll open is Pat Burton at Smith Barney.

It's a follow-up question, Harry, to the last one, and that is in the SG&A line, where you've made tremendous progress, what's the outlook there for additional cost savings as we move forward?

Pat, I think there still is room for improvement when we look at some of the corporate functions we have in SG&A, we've been sitting down recently and talking about how we can have process improvement and other efficiencies, so I think there is still room for improvement. I think it's not limitless, but, you know, I think there's still a good -- in the G&A area, a good year and a half of work here for us to get to more efficient cost levels. I think, once again, you know, for those of you who have less background with us, you know, we emerged in our IPO from a collection of 46 country partnerships, and a lot of the G&A we had at the time was country-based, and we're starting to streamline now that we're a global U.S. GAAP reporting company, and we've gone part of the way, but I still think certainly when I look at my area as a cost function in the finance area, we still have some good room for improvement to go here.

So about another one and a half years. Thanks.

Ok. Let's go ahead and wrap it up. I want to close, I want to thank you all for your support and confidence in Accenture. We all here remain intensely focused on executing our business strategy and serving our clients, and I want to thank you again for joining us today.

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