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Operator
Ladies and gentlemen, thank you for standing by and welcome to the Accenture Third Quarter Fiscal Year 2003 earnings conference call.
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I would now like to turn the conference over to our host, Director of Investor Relations Ms. Carol Meyer.
Please go ahead.
Carol Meyer - Director-Investor Relations
Thank you, operator and thanks everyone for joining us.
With me today are Joe Forehand, Accenture's Chairman and Chief Executive Officer and Harry You, our CFO.
And we're pleased all of you are joining us today on our FY '03 Third Quarter Earnings announcement.
By now I hope you've had an opportunity to review the news release we issued earlier this morning.
In a moment, 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 Q&A.
As a reminder, when we discuss revenues during today's call we're talking about revenues before reimbursement, or net revenues.
Some of the matters we will discuss on this conference call are forward-looking, and I need to advise you that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
Such risks and uncertainties include, but are not limited to, general economic conditions and those 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 on this conference call.
So with that let me turn it over to Joe.
Joe Forehand - Chairman and CEO
Thank you, Carol, and good morning everyone.
And thank you for joining us today.
I'd like to begin with an overview of our third quarter results and then look more closely at some of the results of the changes that we have made and have been making to our operating model to support the execution of our strategy.
After my remarks, Harry will discuss the financial details of the quarter.
So first, the third quarter results.
Certainly given the challenging market conditions, we think our performance in the third quarter was satisfactory.
Our people around the world continue to do an excellent job serving our clients and delivering value.
And I certainly want to recognize their hard work and dedication.
Net revenues for the quarter were $3.04 billion, an increase of 2% in U.S. dollars and a decrease of 5% in local currency, compared with the same period last year.
These results reflect the positive effects of exchange rate movements.
Diluted earnings per share for the quarter were 28 cents, a 6% increase from the 27 cents in the same quarter last year.
Operating income was $404 million, a 7% decline from the $435 million in the same period last year.
The decline resulted from lower gross margins due in part to a $50 million increase in severance costs, which was partially offset by lower selling general and administrative costs as well as the foreign currency effects.
Operating income as a percentage of revenues for the third quarter was 13.3%, compared with 14.6% in the third quarter last year.
Outsourcing accounted for $944 million of revenues for the quarter, which is an increase of 35% in U.S. dollars, and 28% in local currency.
Outsourcing now represents 31% of total revenues, up from 23% of total revenues in the third quarter last year.
We continue to target outsourcing, in particular business process outsourcing, as a key area for growth.
Consulting revenues were approximately $2 billion a decline of 8% in U.S. dollars and 16% in local currency from the third quarter last year.
Harry will discuss with you our results by operating group later.
Let me turn to new bookings, which were very encouraging again this quarter.
New bookings for the quarter were $5.2 billion, which is a 47% increase over the third quarter last year.
And of the $5.2 billion in new bookings, $2.2 billion of that was in consulting, which is a year-over-year increase of 6%.
New bookings and outsourcing were $3 billion, representing a 107% year-over-year growth.
Of the $3 billion in outsourcing new bookings, 58% were in business process outsourcing.
Again, this is very encouraging, as BPO is an area where we feel we have an opportunity for significant growth.
It is also encouraging to note that we had now nearly $10 billion in new bookings for the second and third quarters combined.
To give you a sense of the size of the wins during the third quarter, we had seven wins over $100 million each, as well as another 21 in the range of $25 million to $100 million each.
Here are a few highlights from the quarter.
We continue to expand our relationship with AT&T by signing a five-year agreement to transform AT&T's residential credit and accounts receivable management functions.
Also in an innovative multiyear deal Wyeth, a leading pharmaceutical company is outsourcing the majority of its clinical data management operations, which are part of its R&D function, to Accenture.
More than 165 Wyeth employees around the world will join Accenture to support these activities.
In Europe we're working with [La Renicentia], a leading Italian retailer, to provide all of its divisions with finance, account processing and related technology services through a shared services company that we will manage.
Finally we increased our cash and strengthened our balance sheet.
Cash at the end of the quarter was $2.1 billion, up $423 million from the prior quarter.
For the nine months ended May 31 operating cash flow was $1.08 billion and free cash flow, net of property and equipment additions was $945 million.
In terms of the challenges we continue to face, we are seeing some effect on our gross margins, which has come in part from the shift in the mix of our business toward outsourcing, which has lower gross margins, particularly during the first year of new contracts.
Also, although the demand for consulting seems to be on an up-tick, we believe the improvement in consulting pricing will lag until we are in a sustained economic recovery.
There is one last point I want to bring to your attention, which will be in our 10-Q we plan to file later today.
We have become aware of an incident of possible noncompliance with the foreign corrupt practices act and with our internal controls in connection with certain of Accenture's operations in the Middle East.
We immediately commenced an internal investigation, which is ongoing.
We do not believe that this incident will have any material impact on our results of operations or financial condition.
We have informed and will cooperate with appropriate governmental agencies in connection with this matter.
And I want to assure you we will pursue this matter diligently to its conclusion.
Let me talk about the execution of our strategy.
So we've covered the highlights of Q3 and looking ahead, just to give you some perspective of the changes we've made to our operating model to support the execution of our strategy.
While we see some economic improvement in certain parts of the world, the overall economic environment is still volatile.
And even the slight improvements we see economically have been offset by continued sluggishness in capital spending and technology spending.
Still, we have made significant progress evolving our operating model, which helps us improve the way we execute our strategy.
Our strategy is focused in three key growth areas.
The first of those is to grow high value consulting.
This is the specialist consulting and the transformational change consulting that Accenture is known for.
Second is to continue to build upon our leadership position and technology services.
And third is to grow outsourcing.
To better enable these areas of growth, we've done a number of things from an organizational standpoint.
We've had success in implementing our work force model strategy.
We now have more than 20,000 people in our services work force, which are those people working on the outsourcing contracts.
And we have grown our solutions work force to nearly 10,000 people now.
The solutions work force is a key element of our global sourcing model, with their deep technology skills.
Our ability to leverage the solutions work force, working closely with our client site based personnel, has helped us drive down our delivery costs and ensure we are competitive in the more mature technologies.
Also from an organizational standpoint, we recently created a BPO organization under the leadership of Jack Wilson, to help increase our market position in this area.
Jack and his team have overall responsibility for our multi client business processing out sourcing businesses, which include Accenture HR services, Accenture finance solutions, Accenture learning as well as NAVATERE and connection to E-Bay businesses among others.
Often BPO involved significant transformation work from our consultant and this allows us to deliver the business outcomes that our clients expect from us.
Also important to enabling growth is our sales effectiveness initiative, which is helping transform the way we sell, especially on large outsourcing projects.
We have more than doubled our win rate since last quarter and cut in half the average days of the wins in the pipeline.
Looking at the cost structure side, we continue to improve the ratio of senior level people to the more junior level people, which is an important part of our economic model.
This ratio of total partners to non-partners across all work forces has moved from 1 to 26 in the third quarter of last year to 1 to 32 this year.
Also on the cost side we're pleased that our SG&A costs decreased $91 million or 11% over the third quarter of last year.
Which corresponds with the reduction of SG&A as a percentage of revenue from 27% to 23%.
Another important part of our operating model is the structured process we have to drive new innovation.
In our service lines, we have created new offerings and assets in areas such as customer relationship management, finance and performance management, and human performance, substantially growing these areas of our business.
In addition, our efforts in the Accenture Technology Labs that brought breakthrough business solutions from emerging technologies are another important source of innovation.
Our R&D professionals spend more than one-third of their time with our clients.
And the work the labs is doing in emerging technologies is being used in serving many of our largest clients.
Overall, our ability to stimulate demand for new innovations and offerings helps distinguish Accenture in the marketplace.
So those are just some of the things we're doing to execute our strategy and deliver innovation.
As I said last quarter, we are not counting on the market to hand us much in terms of demand improvement for the rest of the year so we continue to focus on innovation in our business and on the precision execution of our strategy.
With that, let me turn the call over to Harry to give you more details about the third quarter.
Harry You - CFO
Thank you, Joe.
Let me comment on our third quarter results, which show increasing signs of business recovery.
Diluted earnings per share for the third quarter were 28 cents, which compares to 27 cents or 6% growth over the same quarter last year, and is ahead of the analyst consensus estimate for the quarter of 25 cents.
Net revenue for the third quarter were $3.04 billion, an increase of 2% in U.S. dollars and a decrease of 5% in local currency compared with the third quarter of last fiscal year.
This exceeds the current analyst's consensus of $2.95 billion.
Our revenue performance this quarter represents the highest absolute revenue dollars for any quarter in Accenture's history.
Absence of consolidation of Avanade and Accenture HR services net revenues for the third quarter increased 2% in U.S. dollars, the same increase as our total revenue growth for the quarter.
Revenue for Avanade were $24 million in the third quarter compared with $17 million in the same period last year.
Revenues for Accenture HR services were $32 million in the third quarter compared with $30 million for the third quarter of last year.
Since we now have full year comparable periods of these two consolidations going forward, we will no longer break out the revenue effect of consolidating Avanade and Accenture HR services.
Other small acquisitions we've made in the last three quarters have a total revenue impact of approximately $18 million with no meaningful operating income impact.
These small acquisitions have generally been at low revenue multiples.
Operating income for the third quarter was $404 million or 13.3% of revenue, a decline of 7% from the same quarter last fiscal year, which totaled $435 million or 14.6% of net revenue.
The decline resulted from lower gross margins, partially due to a $50 million increase in severance costs in the third quarter this fiscal year, which was slightly offset by lower selling, general and administrative costs and favorable foreign currency effects.
Operating income adjusted for total Q3 severance costs is $73 million, with 15.7% of revenues compared to 15.4% of revenues adjusted for severance of $23 million for the same quarter last year.
Let me comment briefly on our pre-announcement policy for those of you who may wonder why we did not prerelease earnings for this quarter.
As we have said before publicly, we will pre-announce when our earnings are either above the top end of our quarterly guidance or below the bottom end of our quarterly guidance, and are materially above or below the analyst's consensus estimate by at least 10%.
In consultation with our audit committee we did not feel our third quarter results warranted a pre-announcement given the 2 cents per share that we gained from positive foreign currency effects.
Certainly we would resolve any close questions or calls on the downside in favor of pre-announcing.
Cost of services before reimbursable expenses totaled $1.939 billion or 63.7% of net revenue for the third quarter, an increase of $186 million over the same period last year.
This increase is primarily due to increased outsourcing costs and severance, partially offset by lower consulting payroll.
Gross margins for the third quarter were 36.3% of net revenue, compared with 41.2% in the third quarter last fiscal year, due to the significant shift in the company's mix of business toward outsourcing, which has lower gross margins, particularly in the first year of new contracts, increased severance costs and moderate pricing pressures.
This decline was partially offset by improved efficiencies in selling, general and administrative costs as a result of our ongoing cost management initiative.
Comparing third quarter gross margins to second quarter gross margins, there was the expected seasonal pick up of 235 basis points because of the higher consulting revenues resulting from the 6% greater number of work days in the third quarter.
Adding back the $73 million of severance expense in the third quarter, relative to the $24 million of severance expense in the second quarter, our gross margins in the third quarter declined 10 basis points on a seasonally adjusted basis with our outsourcing portfolio performing as targeted, which I will elaborate upon further in a few minutes.
Adjusting for the impact of a greater number of new outsourcing contracts, ramping up this quarter versus last fiscal year and versus Q2, our gross margins Apples to Apples is slightly improved reflecting renewed stability in our outsourcing execution.
As I mentioned before, our long-term efficiency initiatives focus on global reductions and delivery and infrastructure costs while our short-term initiatives focus on managing payroll costs and reducing other costs, such as travel and meeting costs and reducing infrastructure and corporate expenses, principally through increased hiring scrutiny and the deferral of non-critical initiatives.
SG&A for the third quarter totaled $702 million or 23.0% of net revenue a decrease of $91 million over the same quarter last fiscal year.
Our sales and marketing spending for the quarter decreased $51 million to 11.9% of net revenue, compared to 13.9% for the same quarter last fiscal year, primarily due to lower and better-targeted business development spending.
Our general and administrative spending for the quarter similarly contributed to the overall SG&A spending decrease and decreased $40 million to 11.1% of net revenue compared to 12.7% of net revenue for the third quarter of last year.
The G&A decrease reflects our cost management efforts, with lower geographic facility and technology costs, and lower bad debt expense.
Although our progress was slow last year, we continue to increase our effectiveness of cutting unnecessary expense in SG&A expense in the current fiscal year.
We have at least another year of continued efficiency, which partially reflect shifting to an inherently lower SG&A base relative to our growing outsourcing business.
We've worked hard in one of the worst periods ever in the IT services and consulting industry to make ourselves more efficient.
This quarter we did not expense any variable compensation, nor did we reverse any previously recorded accruals in the third quarter.
This compares to $8 million in variable compensation expense recorded in the third quarter last fiscal year.
However, for only the second time since IPO we will be paying cash variable compensation this month as we are in a position to pay out one quarter of our accumulated variable compensation accrual today.
As I mentioned during our last earnings call, I will continue to give you visibility on the economic benefits of the real estate charge, although I caution again that these benefits will decrease over time as the lease obligations expire.
As a result of the one time charge we took in the fourth quarter of fiscal year '02 related to the restructuring of our real estate, operating expenses were $5 million less than they would have been otherwise for the third quarter and $25 million less for the nine months ending May 2003.
In addition, this quarter we have reduced our annual effective tax rate for this fiscal year from 38.0% to 36.3%, as we were successful in reaching favorable determinations of our tax liabilities for some open tax years with tax authorities outside the U.S.
We established tax reserves in prior years corresponding to specific local country tax risks.
As a result of these favorable determinations, we released the corresponding tax reserves to income.
The result is a reduction in our projected annual effective tax rate for this fiscal year from 38.0% to 36.3%.
Since the provision for taxes in the first six months was based on an effective tax rate of 38.0%, the reduction in the annual effective tax rate reduced the effective tax rate for the three months ended May 31, 2003, to 32.9% compared to 38.0% in the same quarter last year, and the provision for taxes was reduced by $21 million, resulting in a two cent benefit to diluted earnings per share.
Our anticipated effective tax rate will remain at 36.3% for the fourth quarter and for fiscal year 2003 as a whole.
We are currently planning an effective tax rate of 38% for next year.
As a matter of policy, we do not publicly forecast next year's effective tax rate until the first quarter.
We will advise you of our assumptions regarding the fiscal year '04 tax rate at the September investor and analyst meeting.
Income before minority interest totaled $277 million, up $3 million compared with the third quarter of last fiscal year.
Consistent with last quarter and is highlighted in our earnings release we're providing you, our public partners and shareholders, with calculations for core earnings as formulated by Standard & Poor.
The core earnings calculations are very close to how we manage our internal P&L to drive our business.
The S&P core earnings calculation principally reflects adjustments to add-back minority interest, includes stock option and related compensation expense, and excludes non-operational items such as net gains or losses on investment.
Accenture's core earnings were $247 million, or 25 cents per fully diluted share for the third quarter compared to $208 million or 20 cents per fully diluted share for the third quarter of last fiscal year.
Accenture's core earnings per share of 25 cents compare with reported fully diluted earnings per share of 28 cents, primarily reflecting the impact of stock options and the employee share purchase plan.
We anticipate that our GAAP earnings and S&P core earnings will very closely coincide by fiscal year 2006, reflecting our strong quality of earnings and the diminution in financial accounting importance of pre-IPO option grants to our employees.
Our outsourcing business grew 35% in U.S. dollars and 28% in local currency for the quarter, reflecting strong growth across all operating groups.
Outsourcing accounted for $944 million of net revenues and now represents 31% of total net revenues up from 23% in the same quarter last year, which is consistent with our growth strategy of expanding our outsourcing business.
Our outsourcing business also grew vertically as seen by the growth in business process outsourcing of 29%, application outsourcing of 33%, and technology infrastructure outsourcing of 68%, which was also relatively small revenue base and many times tied to BPO deals.
Although last year was a tough quarter comparison, our BPO revenues grew 19% sequentially over the second quarter of 2003.
Most important, our 56 largest and most complex outsourcing contracts, based on an analysis we shared with our management committee, are performing in aggregate at planned levels from when these contracts were executed.
We are comfortable with the trajectory of each individual contract within the portfolio.
There is certainly more risk and volatility in our portfolio because the contracts are inherently larger and often focused on pioneering new areas for client performance enhancement.
We are very determined to ensure that we can deliver strong operating and financial performance from outsourcing.
We continue to get outstanding synergistic benefits between our consulting work and our outsourcing efforts with large clients with each type of work benefiting the other in a complementary fashion.
There's no doubt that a downward effect on consolidated gross margins with our greater share of outsourcing revenue, however we're trying to maintain as you've seen in the last two years a generally stable industry leading operating margin.
In addition, gross margin in the first year of outsourcing contracts have recently been at lower levels than in past years as we garner market share in this strategic growth area for Accenture.
Consulting revenues were approximately $2 billion, representing a decline of 8% in U.S. dollars and 16% in local currency from the third quarter last fiscal year, as all of our operating groups, with the exception of government, experienced declines in consulting revenues over the third quarter last year.
Although at a lesser rate of decline than prior periods.
We continue to offset to an increasing extent pricing and volume pressures with increased solutions revenue, although there has been some modest net loss of revenue.
Let me describe our operating group performance in U.S. dollars.
Our government-operating group grew by double digits again this quarter to 28% over the third quarter last fiscal year.
This increase is primarily due to a 61% growth in outsourcing revenue, a 16% growth in consulting and overall revenue growth in North America and Western Europe.
Financial services increased 4% over the third quarter of last fiscal year, primarily due to the growth in the banking industry group, partly offset by the continued impact of the economic downturn on the capital markets industry.
As I have mentioned before, this could be a bullish technical indicator of a true turn in our industry cycle.
The resources operating group increased 1% over the third quarter last fiscal year, mainly due to growth in the utilities industry group which offset declines in other industry groups.
Our products operating group reported net revenues of $679 million, a slight increase over the $678 million reported in the third quarter last fiscal year.
Growth in the pharmaceuticals and medical products and transportation and travel services industry group offset declines in the other industry group, particularly in the health services and retail industry group.
Our communications and high tech operating group declined 7% over the third quarter last fiscal year, as this was a tough quarter comparison in C&HT's outsourcing business due to the large business transformation contract signed in the last 12 to 18 months.
In addition, C&HT continues to experience lower consulting revenues in North America.
This quarter we continue to experience significant effects from exchange rate movements.
Revenue growth in Europe increased 11% in U.S. dollars in the third quarter, but declined 6% in local currency due to the appreciation of the euro and British pound.
The euros relative strength against the U.S. dollar continues to significantly impact our reported European growth, since over half of all revenue generated in our European business is denominated in the euro.
European revenues were significantly impacted by foreign currency movements year on year, with revenue declines in the UK of 12% in local currency and 2% in U.S. dollars.
Growth in Spain of 5% in local currency and 25% in U.S. dollars.
A decline in France of 2% in local currency, yet growth of 20% in U.S. dollars.
A decline in Italy of 8% in local currency, yet a growth of 13% in U.S. dollars.
And likewise a decline in Germany of 8% yet a 12% growth in U.S. dollars.
While there should be easier comparisons in the UK later in the calendar year, we are concerned and watching carefully the effect of the strong euro on European corporate profits and the concomitant impact on European IT spending.
The Asia Pacific region recorded a growth of 3% in U.S. dollars this quarter and decline of 6% in local currency, primarily due to the appreciation on the Australian dollar and the Japanese yen.
Revenues in Japan grew by double digits this quarter to 20% in U.S. dollars and 9% in local currency.
We appear to have gotten through the whole SARS situation with minimal damage to revenues and earnings and with modest, so far, delay of new business generation.
Finally, our America's region reported a 5% decline in both U.S. dollars and in local currency reflecting the strength of the U.S. dollar against the Mexican Peso and the Brazilian Rial, which was partially offset by the strengthening of the Canadian dollar, contributing to the America's performance this quarter is an 8% revenue decline in the U.S. in both U.S. dollars and in local currency, offset by growth in Canada of 86% in U.S. dollars and 73% in local currency with the contributions of the customer work and BC Hydro contracts.
Chargeability this quarter is at the high end of our target range surpassing 80% with considerable improvements in most of our geographies, including the U.S., Canada, Latin America, UK and Ireland, Nordick, France, Germany, Spain and Portugal.
There are some slight declines in the Asia Pacific region.
Net bookings for the third quarter, as Joe mentioned, were 5.18 billion, an increase of 47% over the same quarter last fiscal year.
The split between consulting and outsourcing new bookings was 43% and 57% respectively.
Most significant, consulting new bookings totaled $2.2 billion, an increase of 6% over the same period last year, although assisted by foreign currency exchange, representing growth in consulting bookings for the first time in U.S. dollar terms since the first quarter of fiscal year 2002.
Outsourcing new bookings totaled 2.97 billion, an increase of 107% over the same period last year.
Of the 2.97 billion in outsourcing new bookings, 58% were in our BPO business, followed by 30% in applications outsourcing, and 12% in technology infrastructure outsourcing.
You will note that total bookings for the quarter exceeded our second quarter total bookings making Q3 of '03 the new second highest bookings quarter ever in Accenture's history.
Geographically, 49% of the new bookings were in the Americas, 45% were in Europe, Middle East, and Africa and 6% were in Asia Pacific.
New bookings for the fiscal year now stand at $12.4 billion, with our fiscal year target of $16 billion within reach.
On the revenue front, we cautiously see some continued improvements in June.
Un-audited total revenues in June grew 13% in U.S. dollars and approximately 5% in local currency over June of last year.
Since June 2003 has slightly more workdays than June 2002, our U.S. dollar revenue growth adjusted for workday seasonality was 11%.
In U.S. dollar terms, un-audited June consulting revenues grew by 5% and outsourcing revenues grew 31% over June of last year.
In this fourth quarter, which is seasonally our weakest, margins are being negatively impacted so far due to the ramp-up of a new set of business process outsourcing contracts.
However, cash flow and cash balances continue to be strong with un-audited cash balances and restricted cash totaling over $2.2 billion.
Our pipeline, which is a collection of subjective estimates of opportunities with a win probability equal to or greater than 70%, is up 1% over the same quarter last year.
Our days to close in the third quarter was 86 days, which compares to 175 days to close in the second quarter, and 231 days to close in the same quarter last year, further evidence that our 2003 selling effectiveness program may be gaining real traction.
Our balance sheet remains strong, with cash, cash equivalents and restricted cash totaling over $2.1 billion at the end of May an increase of $423 million from last quarter.
Our debt totaled $69 million, an increase of $10 million from last quarter, due to the acquisition of a small Microsoft Systems Integrator GA Sullivan, which had a $10 million note outstanding.
Operating cash flow for the quarter was $467 million, primarily driven from strong income generation for the quarter and favorable working capital movement.
This compares to $291 million of operating cash flow for the third quarter of fiscal 2002.
Free cash flow for the quarter defined as operating cash flow less property and equipment additions of $55 million, was $412 million, an increase of $186 million over the third quarter last fiscal year primarily due to lower growth in client balances of $166 million, lower taxes payable of $104 million, and a decrease in accrued payroll and related benefits of $89 million.
The non-current portion of our client financing arrangement, which is long-term capital to run our long-term outsourcing contract totaled $127 million, an increase of $7 million from February, and an increase of $21 million from August.
DSOs remained at 48 days again for the quarter, still well ahead of virtually all of our competitors.
Excluding the effects of non-current customer financing, DSOs 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 200 clients totaled $88 million at May 2003, up $3 million from $85 million at February and down $10 million from $98 million at November.
Of these receivables, $41 million are over one month in age.
As I mentioned in the previous earnings call, we continue to be diligent in monitoring our client's credit quality and do not see an increase in risk in our receivables portfolio.
In fact, for the third quarter in a row bad debt recoveries have exceeded new bad debts identified.
On a nine month fiscal year-to-date basis operating cash flow was $1.8 billion compared to $547 million for the nine months ended fiscal 2002, reflecting lower growth in net client balances and lower income taxes payable offset by reductions in accrued payroll and related benefits.
Free cash flow for the same period totaled $945 million compared to $391 million for the nine months ended fiscal 2002.
We now expect to exceed significantly our full year FY 2003 target of $1 billion in free cash flow.
We're very pleased with our partners' ability to take up our EVA maximization initiative this year to become even more operationally efficient and capital stingy than when we were partnership.
Additionally our credit ratios and returns continue to be strong with ROIC of 58% for the quarter and total debt to total capital ratio remaining at 4% this quarter as compared to the year-ago value of 9% our EVA was 10% of revenue this quarter, a slight decline over the same period last year although at a lesser rate of decline than operating income because of working capital efficiencies.
Transitioning to the share management front we contributed $150 million in March to our share employee compensation trust for new partners and other employees and repurchased 300,000 shares for approximately $5 million in the three months ended May 31, 2003.
For the nine months ended May 31, the Sect (ph) has repurchased $5.19 million shares for a total of $84 million.
At the end of May the trust had $151 million available for share repurchases, which is segregated as restricted cash on the consolidated balance sheet.
Additionally, in June Accenture limited redeemed or purchased an aggregate of 1.945 million shares of Accenture SCA class one common at a price of $15.93 per share.
At the same Accenture international SARL purchased 10,000 Accenture Canada Holdings, Inc. exchangeable shares at a price of $15.93 per share.
The total cash outlay for these transactions was $31 million.
We have continued to facilitate various aspects of our partner share management plan, including our quarterly partner transactions and various programs to permit partners to establish family and charitable trusts.
Taking into account recent retirements, the percentage of “inside ownership” in Accenture shares held or controlled by our active partners now stands at approximately 55%.
As we mentioned to you before, we will be working in the next year with our board on our strategy for longer-term ownership levels of Accenture by its partners.
We would certainly like to continue to see meaningful ownership of the firm by its partners and employees to ensure that we operate our business in full harmony with you, our public partners and shareholders.
On our potential secondary offering, we continue to be patient, waiting for the stock market to be robust and for our business to be on a clear, positive trajectory.
I believe we are getting meaningfully closer to this point, although we are not planning on launching a secondary offering this summer.
Our $2.2 billion in cash balances give us more than enough flexibility should the market take a decisive turn for the worst.
As we mentioned before, after the next one or two secondaries, we may have a different perspective on dividend policy.
We are doing exhaustive analysis country by country on the dividend policy issue.
I do want to point out a technical change we will be making in our pending shelf registration statement.
We will be increasing the number of shares registered on behalf of our partners from 100 million to 150 million shares.
Our periodic partners surveys give no indication that partners will sell near the original 100 million shares in a secondary offering.
The reason for the increase in the number of shares to be registered derives from the fact that the SEC has asked that we provide more information regarding our partners' shareholdings in our registration statement.
Consequently, we want to make sure we have accommodated all available shares that could be sold by our partners now so that we avoid unexpected mechanical amendments to the registration statement that might arise as a result of other transactions under our partner share management program, such as our quarterly partner liquidity transaction.
For the quarter, the weighted average diluted shares outstanding is $985.6 million, compared to $997.8 million at February '03 and $1.028 billion for the same period last year.
We remain committed to our public shareholders and partners not to be significantly diluted if our financial performance does not warrant it.
Our current head count stands at approximately 80,500 of which 71,500 is billable and 9,000 is support personnel.
Our support personnel at the time of IPO was 14,300, of which approximately 1,750 transitioned into Accenture technology infrastructure services and Accenture human resource services over the last several quarters.
We are practicing what we preach to clients in terms of placing personnel in service centers and merging our back office work force with our clients in some cases.
We are now up to 9,700 personnel in our solutions work force, and we expect to end the year at roughly 11,000.
Let me now comment on the accounting changes affecting our industry.
As you know in addition to any changes in accounting for options, our industry will be impacted by recently issued EITF 00-21, EITF 01-08, PIN 45 and PIN 46.
Of these only 00-21 is expected to have any notable impact to Accenture, although we are currently estimating the magnitude.
While I have no reason to believe that the thrust of our comments and previous 10-Qs on the magnitude of the impact of 00-21 will change, I would like to point out that we made these comments based on drafts of 00-21 that turned out to have significantly different scope from the final wording of the new accounting treatment.
Given the two choices of prospective accounting in cumulative restatement, Accenture will choose the method of accounting, after consultation with our audit committee, that best describes the economic reality of our business and its financial measurements.
We will give you our estimate of the impact as well as our preferred accounting treatment at our September investor and analyst meeting.
We do not see any material impact of 01-08, which covers embedded leases, nor do we have any significant off-balance sheet entities relative to PIN 46.
We expect given market demand there could be significant guarantees or contingent liabilities under PIN 45 in the future because of, for example, complex legal structures where we have multiple subcontractors but we will continue to manage closely material liabilities or risks through our capital committee which Joe and I, among others, sit on.
We expect the fourth quarter earnings per share to come in between 21 cents and 25 cents and fourth quarter revenue growth to be between 5 to 10% over last year's fourth quarter.
As you all know, the fourth quarter is quite volatile for us with the inherent unpredictability of the summer holidays relative to our consulting work force and the billable hours that we can expect, it's heartening to see the potential of double digit revenue growth in U.S. dollars and the possibility of positive in local or constant currencies.
We're being conservative on our guidance for this quarter because we did benefit significantly from FX in Q3 which may or may not be transitory and because the certain Q4 costs which are slightly higher than we estimated three months ago.
With only a few weeks left before the end of the fiscal year, I wanted to look to the year ahead.
We will give our formal annual guidance for fiscal year '04 at our investor and analyst meeting on September 16th and 17th.
Clearly it is a tribute to the 80,000 men and women of Accenture to see the revenue growth we have squeezed out in the last year.
We are also on track in fiscal year '03 to grow earnings per share in double digits and to grow free cash flow at over 50%, although there have been some items which are not expected to recur.
While we have not finished our analysis on the various accounting changes and impacts, nor have we finalized our FY '04 plan, I would anticipate that we will probably be using $1.10 earnings per share for fiscal year '04 in developing our executive variable compensation plan and operating goals for the next year.
This figure of $1.10 per share could very well be further adjusted before our analysts meeting and during the course of next fiscal year due to changes in accounting for options as well as due to our changing estimates of the response of clients to slight differences in contractual structure, which we will be presenting our clients during the course of the year as a result of 00-21.
We believe we can grow operating cash flow to about $1.6 billion for fiscal year '04.
We currently expect property and equipment additions for next year to be around $300 million, giving us free cash flow as we define it of $1.3 billion, which would represent 15 to 20% growth apples to apples.
As I said earlier, our analysis for next year is ongoing and we will finalize these numbers and provide our computations to you at the investor and analyst meeting.
I wanted to point out that despite all of the changes in the economic, industry, and accounting environments, we believe we can continue to grow free cash flow at a healthy pace, similar to the pace of improving our business.
We think by providing more visibility on free cash flow and reconciling to operating cash flow in future quarters, we can provide another consistent metric for which the quality of our business may be monitored.
I am very comfortable that we have identified for next fiscal year meaningful financial and operating improvements with more efficient use of our balance sheet relative to our clients and in running Accenture.
While our future financial and operating efficiencies are by no means limitless and while much of the low-hanging fruit has been plucked, there are still more than enough opportunities to grow free cash flow at double digit levels in the next two to three years with some good measure of independence from any economic and industry pressures and realities.
The eight quarters since our IPO have been an enormously challenging period.
Everyone at Accenture has risen up to the challenge and despite the economic headwinds has sacrificed and endured to create a stronger more financially sound company.
Sometimes, it has been hard to reconcile during this period why we keep setting our standards higher as the environment gets more and more difficult, but in the end we are committed to creating the best value propositions for our clients and a great working environment for our people, and these synergistically foster and are fostered by the strong financial results we have worked so hard to deliver.
While we still cannot definitively predict the ultimate industry upturn, we hope we might be seeing the dawning of a new positive industry cycle.
Joe and I look forward to seeing you at our investor and analyst meetings, September 16 and 17 in New York to discuss not only these issues, but to have our senior management team discuss Accenture's outlook and their views on our changing industry landscape.
Operator, could you please open it up for questions?
Operator
Thank you.
Once again, ladies and gentlemen, if you do have a question or comment, please press star followed by one.
The first question today comes from the line of Greg Gould with Goldman Sachs.
Please go ahead.
Greg Gould - Analyst
Thanks.
Harry and Joe, given the pickup or the year-over-year growth acceleration in the month of June in the U.S., is there a signal here that year-over-year growth in the U.S. could be positive for the full August quarter?
I'm trying to reconcile the pickup in bookings, but somewhat weaker than expected revenue growth in the U.S. for the May quarter and trying to figure out what is likely for the August quarter?
Joe Forehand - Chairman and CEO
You know, I think although we're seeing certainly some pickup in business activity in the U.S., Greg.
Some of it is driven from the success of our outsourcing.
And I think we will see, as we've indicated, overall a range of revenue growth in the 5% to 10% in the August quarter, it would be a little premature to break that down into the various components of our organization at this time.
But we are seeing some pickup in certain parts of the world, and certainly the U.S. particularly with the outsourcing business.
Greg Gould - Analyst
Okay.
And bookings for the quarter were much better than we anticipated.
Was there anything unusual in terms of what was in the pipeline when it was awarded?
Was there a big lump of business that was awarded and therefore it could be weaker on the subsequent quarters?
Joe Forehand - Chairman and CEO
No, if you look at the size of the deals we've done, there are just a lot of mid-size deals and the deal flow in our pipeline is consistent with what it's been.
And they were six, as I said, above $100 million.
And I think a lot of the success we've had with business process outsourcing, the deals are slightly smaller than what you might see in the traditional IT outsourcing space.
And then that serves us well, frankly.
Greg Gould - Analyst
Sorry.
One last question.
The sales effectiveness improved a lot in the quarter.
Is that sustainable?
Joe Forehand - Chairman and CEO
Well, I don't know.
It was a very good improvement.
We have focused an intense effort over the last six months at really trying to manage our pipeline better.
And we really, this last quarter, saw the significant improvement in both the win rates of the opportunities we're pursuing as well as just the average time in the pipeline and how much of that is due to market conditions, acceptance of outsourcing, versus our own efforts is a little unclear looking forward.
But we have made this a priority and we're executing in how we look at qualifying each opportunity and putting the right resources and matching the cost we spend on them.
So I think part of that is sustainable as we look forward, based on the efforts we've got.
Part of it could be just more market acceptance of outsourcing as well.
Greg Gould - Analyst
Thank you.
Operator
Next we'll go to the line of David Togut with Morgan Stanley.
Please go ahead.
David Togut - Analyst
Joe, could you comment on the pricing environment and consulting and in particular the impact of the growth of your solutions work force.
Joe Forehand - Chairman and CEO
Yeah, I think we're seeing, even though we're starting to see, as you can look at the overall volumes, some improvement in up-tick in the consulting business.
We haven't seen the up-tick in the pricing environment.
And our belief is there may be some lag that may happen before we start to see an improvement in pricing.
Until we can see and our clients see a more sustained economic recovery.
We're working hard on it, continuing to try to ensure we focus on, first of all, value to our clients, which allows us to deliver better pricing, but I think we'll see the volume pick up before the pricing picks up any material degree.
I think your second question was related to the solutions work force, is that correct?
David Togut - Analyst
Yes.
Joe Forehand - Chairman and CEO
I think one of the things we've done very well is the ability to be able to use our solutions work force to provide the level of software engineering and technology expertise at a much lower price point to our client.
That coupled with our client site teams enables us through our global delivery centers to take advantage of that.
And I think while certainly there may be some parts of it that might be a substitution effect to our consulting work force, I think what we're seeing is it gives us the opportunity to be much more competitive with our global methodology standards and tools to be able to deliver a solution to our clients that's got the right price point and the right level of skills and capabilities globally that we can manage our business to.
And I think to some extent that is helping us in the marketplace, definitely.
And we'll continue as we said, we will pass the 10,000 mark.
In fact, we already have in the fourth quarter.
And we're continuing to grow our solutions work force as we make that an important part of our overall competitive offering, while we focus within our developed countries on innovation.
As I said, and I made a point in the call to talk about how we're investing in innovation.
So it's extremely important, if you look at our major developed countries in the Europe and the U.S. to be able to continue to innovate, to be able to look and to find new business applications for technology, to look at, to find new innovative ways, some of the ways we're doing with the whole customer area, pretty exciting as we see the next wave as our clients work on growing the top line.
Some of the assets, some of the intellectual property, some of the offerings we're focused on with our consulting work force and our service lines in the developed countries mean we have to continue to break through new innovation and new inventions while recognizing that there's a certain part of the services offering and more mature technologies that we've got to offer at a competitive price points, is both innovation and lowering the cost of delivery.
We have to work on equally hard.
David Togut - Analyst
Thanks very much.
Operator
We have a question from the line of Adam Frisch representing UBS.
Please go ahead.
Adam Frisch - Analyst
Thanks.
Good morning, guys.
Harry, if you could clear up an issue for me on the consulting bookings.
They seem to be in the last six months I guess incrementally better than the six month period before that.
Yet the revenues were, on a cost of currency basis, were down 16%.
If bookings are getting better how come we're not seeing that in revenue?
Is it a duration thing, where the geography, where the bookings are happening or maybe a ramp issue with the war?
Could you give us some color on that?
Harry You - CFO
Yeah, I think, Adam, it's primarily a duration issue.
We're starting, as I alluded to, relative to the June un-audited results that consulting revenue declines are shrinking.
So I think the projects that we're doing are more sophisticated and complex.
They may have a bit more lag and I also think, frankly, we're going to have some easier comparisons here in the next couple of quarters.
Adam Frisch - Analyst
So maybe not a great thing for this quarter but for the future quarters bodes pretty well the way that's tracking?
Harry You - CFO
We hope so.
Adam Frisch - Analyst
Okay.
Joe, at the end of your comments you mentioned a potential issue with foreign competition practices act, the name of the act sounds pretty serious, but did you have to disclose that because of legislation, or did you disclose that because of materiality to Accenture?
Joe Forehand - Chairman and CEO
Well, we became aware of this incident, as I mentioned.
It is an investigation we launched immediately when we became aware of it.
It was not something that we were required -- it was required because the investigation is ongoing.
So we felt that it was the right thing to do.
And we don't believe it has any material impact on our results or financial conditions at all, but -- and we have notified or we've cooperated and informed the governmental agencies and we're going to pursue the investigation very diligently.
But we voluntarily have come forward with this and we're going through the investigation.
We'll have more to say when we get it done.
Adam Frisch - Analyst
Okay.
But not something that we necessarily should be worried about?
Joe Forehand - Chairman and CEO
I'm not going to speak anymore to it.
I don't think it has any material impact on our financial condition at this point.
Harry You - CFO
I would add, we take very seriously, Joe and I, any violations of Accenture's code of conduct or any potential illegalities and we also just take very seriously making sure that all our investors and shareholders have the right realtime information on what's happening in the company, whether it's good or bad.
Adam Frisch - Analyst
Who is actually doing the investigation?
Joe Forehand - Chairman and CEO
We have an internal investigation going on that's being led with our general counsel and outside advice and it's being pursued at this time.
Adam Frisch - Analyst
Okay, sounds good.
Last point on India.
If you can just give us a head count check up there and talk about what your growth plans are.
Harry You - CFO
We have about 2,000 people now in India, and I think, Adam, we continue to aggressively grow at the same time as we have always said and we won't grow supply in advance of demand.
But we're seeing very good demand here in the year ahead.
Adam Frisch - Analyst
Okay.
Thanks, guys.
Joe Forehand - Chairman and CEO
Thank you.
Operator
And we'll go to the line of Andrew Steinerman with Bear Stearns.
Please go ahead.
Andrew Steinerman - Analyst
Hi there.
Question for Harry about consulting bookings at Q2.
As you know I like to look at things sequentially, which is down sequentially from Q4 in the February quarter.
And I think I remember that February bookings were around a billion dollars and so I know not everything is perfect.
But when you look at sequentially at consulting bookings, does it give you an encouraging feel or in aggregate the numbers are sequentially down even though there's an easier comp and year-over-year they're up?
Harry You - CFO
I would say, Andrew, the way I'd balance that is sequentially, and Joe may comment differently, but I think we're basically running on the same track or pace in the last two quarters.
We had a very outstanding early part of the calendar year, as you alluded but that's to be expected.
Just with the normal seasonality of our business, the beginning of a calendar year and then also the beginning of our fiscal year when people come back from summer holidays, tends to be stronger for consulting bookings.
And then as you correctly point out, the next couple quarters we should, thank goodness, have some easier comparisons, not only for bookings, but also hopefully here for revenue.
Andrew Steinerman - Analyst
And on a monthly basis consulting bookings looked smooth for the quarter and no unusual cancellations or delays of passed consulting bookings?
Harry You - CFO
That's correct.
Andrew Steinerman - Analyst
Okay.
Thanks so much.
Harry You - CFO
Thank you, Andrew.
Operator
Next we'll go to the line of Dirk Godsey representing JP Morgan.
Please go ahead.
Dirk Godsey - Analyst
Yeah, thank you.
Good morning, guys.
I was wondering Harry, if you could just a little cleanup activity here, itemize all of the one-time benefits and charges in the quarter so we get that straight?
It sounds like there's a two cent tax benefit as well as a two cent foreign currency benefit, I'm not sure what all the offsetting charges if any might be.
Harry You - CFO
Well, as I pointed out, Dirk, we got about $8 million, very small benefit, from not accruing variable compensation this quarter compared to the year prior quarter.
There was a $5 million benefit from the real estate charge from Q4 of last fiscal year.
And those are probably the biggest items in the comparison.
As I mentioned in talking about the $1.6 billion in operating cash flow and $1.3 billion of free cash flow, as we define it, that we're targeting for next fiscal year, there have been some non-recurring benefits to cash flow this fiscal year, which will show you the calculations, in September, at the analyst meeting.
But for the quarter, for the P&L, the two items you highlighted and the additional couple I highlighted, were the basic activity, in addition to the severance which we broke out for you which we're hoping will calm down a little bit or moderate if the economy continues to improve.
Dirk Godsey - Analyst
Just as a follow-up here.
I was hoping you could kind of step through the sequential decline that you're indicating.
You're going from the reported 28 cents to this range of 21 to 25.
Just looking at the severance component alone, it sounds like you had $70 million of severance costs in the third quarter and I don't know what your benefit is you're expecting in the fourth quarter.
Earlier you were talking about a $50, $60 million benefit.
So I'm trying to get kind of a walk through the pluses or minuses going from 28 to somewhere in the 21 to 25 range.
Harry You - CFO
Well, normally, the third quarter, if you have to pick a quarter, is the best quarter, the second best quarter and the fourth quarter is definitively the weakest quarter and certainly if you look at what our history has been in the past whether it was two years ago when I started, and I think we were at 10 cents and last year was 16 cents.
But with a lot of severance, but at the same time with $140 million of variable compensation reduced, it's just a quarter, Dirk, where I would describe it as we have about two-months of full operations and then one month where things are relatively quiet.
It's harder to make margin and more unpredictable.
And then as I mentioned in my comments, they're probably in the order of magnitude of $10 to $20 million of additional costs that have crept in that we probably will have in the fourth quarter, which we didn't anticipate three months ago.
So that's a reason I think just to cut directly to the chase here, I think we gave guidance of 22 to 27 three months ago, we're now at 21 to 25.
Those extra costs just move the mean down a little bit.
But we'll certainly continue to try to do our best here and see what we can deliver this quarter.
Dirk Godsey - Analyst
Just one last quick one, then.
You gave kind of a 110 as a guidepost for next year.
Does that require revenue growth to get to that kind of target and if so what kind of order of magnitude are we talking about?
Harry You - CFO
We'll discuss that in September, Dirk.
I just want to make sure that people understood as we've understood that just with all the accounting changes pending in the next fiscal year for better or for worse, the guidepost is going to move around and then the subtlety, which I'd like to repeat again to make sure everyone understands, is we don't know how clients will respond to our response relative to 00-21, and we'll certainly update people in terms of how that affects our revenue and margin.
But that's going to be more of a moving target than we've typically had in the past.
So we still need to finalize the plans.
Still need to finalize all the assumptions and finalize whether indeed we set compensation and the operating group goals around $1.10 or not.
But I'd like to also give again the caveat that the $1.10 will move depending on how we go forward with any change in accounting for options, if that in deed goes through and then the 00-21 issue.
And then once again, and finally, there's certainly consistency, and I certainly take great reassurance relative to looking at our cash flow metrics and looking in particular at operating cash flow as well as how we calculate free cash flow, that they will be less impacted if at all by all these accounting changes and give you therefore a very good barometer of the pulse of our business as well as the ongoing improvements and efficiency gains in the coming year.
Dirk Godsey - Analyst
Okay.
Great.
Thank you.
Harry You - CFO
Thank you, Dirk.
Operator
Next we'll go to the line of Moshe Katri with SG Cowen.
Moshe Katri - Analyst
Could you talk about gross margin trends?
Where do you think gross margin could stabilize down the road?
Maybe you can talk also in this context about the trade off between gross and operating margins and your transformational outsourcing business.
Thanks.
Harry You - CFO
We're trying to, as I mentioned in my comments, Joe and I and the whole organization are managing to operating margin and earnings per share as well as to cash flow.
And it happens that structurally these outsourcing contracts, as is typical when you look at the rest of our industry, have lower gross margins and the challenge for us is to make sure that we put on those lower gross margins a lower SG&A base that can still execute these contracts effectively.
And so I think first and foremost we're focusing more on the bottom line and how gross margin evolves really depends on how our outsourcing business evolves and how our consulting business recovers.
So I'm not going to venture a guess on how that mix is going to shift.
But we certainly are going to manage to the bottom line as well as to cash flow.
Moshe Katri - Analyst
Can we assume then that the operating margin trend down the road should remain stable, let's say, the 13% to 14% level?
Harry You - CFO
Well, as we've said to you Moshe, especially in this period of economic volatility, we hate to hazard a guess on margin.
We mentioned at the time of IPO, we thought we could get modest operating margin movement.
We have so far, but I think we really need to understand how the whole BPO market evolves.
I think we're only in the bottom of the first inning here in terms of BPO, so I don't think Joe or I are going to venture predictions on operating margin.
Although you can rest assured that we will do whatever is prudently possible here to optimize the efficiency of our business.
Moshe Katri - Analyst
Thanks.
Carol Meyer - Director-Investor Relations
Operator, I think we have time for just one more question, please.
Operator
Our final question today comes from the line of John Jones with SoundView Technology.
Please go ahead.
John Jones - Analyst
Thanks.
Last week TPI held a conference call and in it they basically said the second quarter's performance for outsourcing deals was very strong.
But took down their view of what the second half of this year looked like.
And basically said that the pipeline for outsourcing deals in the second half of the year was down from 34 to 21.
Would you comment on your view of the world versus what they told us last week and try to build a bridge between your more positive comments and theirs or --
Harry You - CFO
I think, John, I did not listen to their call, but I think that really what one has to juxtapose is, as I mentioned our pipeline has slightly increased.
I think we continue to have very vigorous calling effort and dialog with our clients on not only consulting potential engagements but BPO transactions and contracts.
And I think any one particular industry source has exposure to a different situations, especially in the third-party consulting realm.
So I probably can reconcile it by saying you have to look at all the third-party consultants and see where their figures add up and I think you also have to look at the bias relative to where the third party consultants get involved versus where they aren't involved so you do a mixed analysis to reconcile the numbers.
But I think very consistent with what everyone is seeing in terms of the global economy ever so slightly improving, we're seeing somewhat cautiously better tone from our clients.
Joe Forehand - Chairman and CEO
I would say, too, particularly with the emergence of BPO, I think part of the issue is just not a clear emerging pattern that you can rely on quite as predictably as when we saw the growth of IT outsourcing.
Now that may change over time.
But I think BPO comes in a lot of different flavors, a lot of different types of things, and I think it's a little harder to get a market view of all the different types of opportunities there are in that space as opposed to the traditional IT outsourcing.
John Jones - Analyst
Might we assume that you don't see TPI in very many of your contract negotiations?
Joe Forehand - Chairman and CEO
That's generally true, certainly with the ones we've done recently with BPO.
John Jones - Analyst
So they probably aren't seeing the whole picture is what the bottom line might be?
Joe Forehand - Chairman and CEO
I think that's fair.
John Jones - Analyst
Okay.
Thank you.
Joe Forehand - Chairman and CEO
Okay.
In closing, I want to thank you, as always, for your support of Accenture.
I think our results this quarter demonstrate our ongoing ability to build on our core strengths of our business as we serve our clients and remain a leader in the industry, and again I want to thank all of you for joining us.
Carol Meyer - Director-Investor Relations
Thank you, operator.
Operator
Thank you.
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