埃森哲 (ACN) 2004 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Accenture Q1 fiscal '04 earnings conference call.

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

  • Later, there will be a question and answer session and if you wish to ask a question, please press the star followed by one on your touchtone phone. [Operator Instructions]

  • As a reminder, today's call is being recorded.

  • At this time, I'd like to turn the conference over to Carol Meyer -- managing partner at investor relations.

  • Please go ahead.

  • Carol Meyer - Managing Partner, Investor Relations

  • Thank you, operator, and thanks, everyone, for joining us today.

  • With me are Joe Forehand -- Accenture's Chairman and CEO -- and Harry You, our CFO.

  • And we're pleased that all of you are joining us for our FY '04 first-quarter earnings announcement.

  • By now I hope you've had the opportunity to review the news release that we issued earlier this morning.

  • On today's call, Joe will begin by providing by providing comments on current working conditions and our overall results in key priorities and 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're talking before reimbursements or net revenue.

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

  • Such risks and uncertainties include but are not limited to general economic conditions and those factors set forth in today's press release and discussed under the risk factors portion of the business section of our annual report on form 10-K, recently filed with the SEC.

  • Accenture assumes no obligations to update the information presented on this call.

  • In our call today, our speakers will reference certain non-GAAP financial measures which we believe provide useful information for investors and we will provide reconciliations of those measures to GAAP.

  • You can find those reconciliations on our investor relations page of our web site at Accenture.com.

  • Now let me turn the call over to Joe.

  • Joe Forehand - Chairman and CEO

  • Thank you, Carol.

  • Good morning and happy new year to all of you and thank you for joining us.

  • I am going to begin with some commentary on our first-quarter results and Harry will cover the financial details.

  • And then I'm going to come before we do the Q&A sessions to describe how we are positioning ourselves from the economic recovery that we're beginning to see in some of our markets.

  • On Q1 results, by now, you've seen our news release with the results for the quarter.

  • We're pleased that revenue grew 11 percent in U.S. dollars and 4 percent in local currency over the first quarter of last year.

  • Diluted earnings per share for the quarter with 33 cents compared to 27 cents in the first-quarter last year.

  • However, as described in our news release our results included a benefit of six cents per share from a reduction in reorganization liability established in connection with Accenture's transition to a corporate structure in 2001.

  • Harry will discuss this in more detail.

  • Let me spend a moment talking about new bookings where the trends continue to be encouraging.

  • First quarter new bookings were strong at $5.05 billion which is more than double last year at this time.

  • Outsourcing new bookings grew to $2.98 billion and consulting bookings grew to $2.7 billion.

  • This is the fourth-quarter in a row with consulting new bookings over $2 billion which is critical to keep a stable base of consulting work.

  • In terms of new business, we had two wins over $600 million each and another 9 in excess of $50 million.

  • Some of the larger outsourcing wins will put pressure on near-term operating margins due to first-year margin compression yet we expect they will deliver our standard margins in about three to five quarters.

  • We're starting to see signs of a pickup in demand.

  • We also continue to focus on improving pricing and margins and I'll come back to this topic later.

  • With that, let me hand it over to Harry to go through our first-quarter results in detail.

  • Harry You - CFO

  • Thank you, Joe.

  • Net revenue for first-quarter of fiscal year 2004 was 3.26 billion -- an increase of 11 percent in US dollars and 4 percent in local currency compared with the first quarter of last year.

  • All of our operating groups posted net revenue growth in US dollars this quarter.

  • Our government operating group had net revenues of 478 million -- an increase of 33 percent, our resources operating group had net revenues of 555 million -- an increase of 14 percent.

  • Our products operating group had net revenues of 701 million -- an increase of 8 percent, our financial services operating group had net revenues of 646 million -- an increase of 7 percent and our communications and high-tech operating group had net revenues of 879 million -- an increase of 6 percent.

  • Outsourcing revenues were 1.17 billion in the first-quarter representing growth of 45 percent in US dollars and 37 percent in local currency, compared to the first quarter of last year.

  • Consulting revenues were 2.10 billion -- a decline of one percent in US dollars and a decline of 9 percent in local currency, compared to the same quarter of last year.

  • As I mentioned in our October earnings call, beginning with this first-quarter release fiscal year 2004, all of our net revenues are now classified and reported as either consulting or outsourcing revenue.

  • Our BPO revenue in the first-quarter which -- as a reminder -- includes both consulting and outsourcing revenue reached 496 million.

  • This is a good start for the year and it reflects our commitment to grow our BPO business.

  • Looking at our three geographic areas, net revenue growth in Europe, Middle East and Africa increased 16 percent in US dollars and 4 percent in local currency for the first-quarter as the U.S. dollar weakened significantly against all major currencies in Europe -- most significantly, the euro and the British pound.

  • For the first-quarter, year on your net revenue growth in the UK was 6 percent in local currency and 12 percent in US dollars.

  • Growth in France was 5 percent in local currency and 21 percent in US dollars.

  • Growth in Italy was 1 percent in local currency and 18 percent in US dollars and growth in Spain was 2 percent in local currency and 17 percent in US dollars.

  • In Germany, however, our net revenue declined 8 percent in local currency but grew 6 percent in US$.

  • Asia-Pacific revenues grew by 6 percent in US dollars, but declined 3 percent in local currency primarily due to a 7 percent decline in local currency in Australia and a 3 percent decline in local currency in Japan.

  • Our Americas region grew by 7 percent in US dollars and 5 percent in local currency, reflecting the strength of the Canadian dollar and the Brazilian real against the U.S. dollar.

  • Operating income for the first-quarter was 507 million or 15.5 percent of net revenue.

  • Operating income included 86.4 million of income from a reduction in reorganization liabilities established in connection with our transition to a corporate structure in 2001.

  • As you can see in attachments to our earnings release today the liabilities reduction are reflected on a separate line item above operating income titled "Reorganization Benefits on our Consolidated Income Statement".

  • In addition the 86.4 million benefit was a non-cash transaction.

  • Excluding the 86.4 million related to these liabilities, the first-quarter operating income would have totaled 421 million or 12.9 percent of net revenue, a decrease of 2 percent or 8 million over the first quarter of last year.

  • Let me give you a little more background on the reduction and the reorganization liabilities this quarter.

  • In fiscal year 2001, we reorganized Accenture, moving from a group of related partnerships in corporations controlled by partners to a global corporate structure under Accenture Limited.

  • The individual transactions that made up that reorganization were in some cases very complex.

  • And the application of local tax law was not always sufficiently clear.

  • We evaluated these situations and established liabilities where they were probable payment.

  • At that time a liability was established for $455 million as an offsetting expense in the same amount reported on a separate line item titled "Restructuring, Reorganization and Rebranding Cost on our Consolidated Income Statement".

  • Since then these liabilities have been continually reviewed and have grown in US dollars, due to the appreciation of foreign currencies against the U.S. dollar.

  • In some cases we have increased our estimates of ultimate liability.

  • In other cases final determinations have been made with payment lowered than we expected.

  • During the first-quarter of fiscal year 2004, final determination resulted in the 86.4 million reduction in the reorganization liabilities.

  • At November 30th, 2003, the carrying amount of these liabilities was $438 million and is reported on our balance sheet as a component of other noncurrent liability.

  • In future quarters and years, we expect the remaining amounts will be paid.

  • However, as further facts become available, we will continue to review and evaluate the expected final determinations of these liabilities.

  • Now let me cover the impact of the 86.4 million reorganization benefit had on each of the operating groups, operating income and market performance.

  • Our government operating group had operating income of 94 million or 20 percent of net revenue and had a $13 million benefit from the reduction and reorganization liability.

  • Absent this, operating income would have been 81 million or 17 percent of net revenue.

  • Operating income and products was 134 million or 19 percent net revenue absent the reorganization benefit.

  • Operating income would have 115 million or 16 percent of net revenue.

  • Operating income and resources was 100 million or 18 percent of net revenues.

  • Absent the reorganization benefit, operating income would have been 86 million or 16 percent of net revenue.

  • Operating income (indiscernible) financial services was 104 million or 16 percent of net revenue, absent the reorganization benefit, operating income would've been 85 million or 13 percent of net revenue.

  • Finally operating income in communications and high-tech were 75 million or 8.5 percent of net revenue.

  • Absent the reorganization operating income would've been 54 million or 6 percent of net revenue.

  • In terms of gross margin in the first-quarter, gross profit margin totaled 1.11 billion and represented 34.1 percent of net revenue, compared with 39.4 percent of net revenues in the first quarter of last year and sequentially 34.4 percent of net revenues in the fourth quarter of 2003.

  • This growth margin decline is due to the shift in our business mix towards outsourcing, continued pricing pressure and lower than expected margins on three contracts in our communications and high-tech operating group which could continue for the next fiscal quarter.

  • These specific contracts perform worse than expected in the first-quarter, accounting for an approximate 120 basis points or $50 (ph) million of the decline in our reported gross margin that you will see in our 10-Q.

  • The rest of our outsourcing portfolio is performing better than planned but not enough to offset the 120 basis point shortfall.

  • Let me make a few more comments about our gross margin performance.

  • Our consulting gross margins have now been stable for the past three quarters.

  • Absent severance costs of 21 million in the first-quarter consolidated gross margin was 34.7 percent of net revenue compared to 40.1 percent in the same quarter of last fiscal year absent 18 million of severance costs on the same basis.

  • When we strip out a credit of 4 million of variable compensation expense that hit our cost of services line our first-quarter gross margin is 34.6 percent compared to 40.5 percent in the same quarter of last year, absent 12 million of variable compensation on the same basis.

  • Of this 590 basis point decline in our adjusted gross profit margin, approximately 210 basis points of the decline is due to the shift in our business mix and approximately 380 basis points is primarily attributable to early year margin compression on our outsourcing contract and the lower than expected margins on the three C&HD (ph) contracts we discussed earlier.

  • We continue to make good strides in our G&A in managing cost efficiency.

  • In the first-quarter SG&A decreased 37 million or 5 percent in spite of the effects of foreign currencies in the first quarter of last year and as a percentage of net revenue decreased 360 basis points to 21.2 percent compared to 24.8 percent in the first quarter of last year.

  • We're on track relative to our SG&A plans for the year.

  • In addition in the first-quarter we incurred severance costs of 27 million compared with 32 million of severance costs in the first quarter of last year, reflecting our ongoing effort to maintain the proper workforce pyramid to support the business as well as to manage performance related issues.

  • Further we did not accrue any variable compensation expense in the first-quarter and we reversed 4 million of previously approved variable compensation.

  • This compares to $17 million of variable compensation accrued in the first-quarter of last year.

  • As you will recall we had planned to accrue approximately 35 million in variable compensation during the first-quarter.

  • This together with the release of the 4 million accrual represented approximately 2 1/2 cents a share.

  • Our expected tax rate for the first-quarter fiscal year 2004 was 34.8 percent and we expect our annual effective tax rate for the remainder of the year to be 34.8 percent.

  • The 86.4 million decrease and the reorganization liability reduced the 2004 annual effective tax rate by approximately 180 basis points.

  • Absent the decrease and reorganization liabilities, the effective tax rate was 36.6 percent within the 36 to 38 percent range we provided you at our analyst meeting.

  • Diluted earnings per share for the first-quarter fiscal year 2004 was 33 cents as Joe mentioned compared with 27 cents for the first-quarter fiscal year 2003.

  • Diluted earnings per share for the first quarter included a 6 cents benefit in reorganization liabilities that I discussed earlier.

  • In addition, our first-quarter EPS included a reduction of close to a penny in average share dilution attributable to the planned issuance of approximately 71 million shares in connection with our secondary offering last September, the proceeds from which were subsequently used to redeem or purchase SGA (ph) shares through the following tender offer on October 30th.

  • This first-quarter bubble effect gave rise to nearly 23 million shares in our first-quarter diluted average shares outstanding of 1.020 billion shares.

  • In addition let me comment on our S&P core earnings for the first-quarter.

  • Accenture's core earnings for the first-quarter of fiscal year 2004 were 260 million or 25 cents per share compared to 224 million or 22 cents per share for the same quarter last year -- a growth of 14 percent.

  • Accenture's core earnings per share of 25 cents compares with a GAAP reported fully diluted earnings per share of 33 cents primarily reflecting the impacting of employee stock option, the share purchase plan expense and the benefit of the decrease in reorganizational liability.

  • Chargeability for the first-quarter totaled 84 percent -- an increase of over 250 basis points over the fourth quarter of 2003, and an increase of over 650 basis points from the same quarter last year.

  • We have (indiscernible) (ph) chargeability from both the consulting and solutions work forces and continue to experience considerable improvement in most of our geographies.

  • Our new bookings for the first-quarter were $5.05 billion.

  • On a fourth quarter rolling average as of November 30th, 2003, our consulting new bookings are up 7 percent and our outsourcing new bookings are up over 40 percent when compared to the fourth quarter rolling average ending November 2002.

  • I think a four quarter rolling average [indiscernible] bookings to more fair comparisons than a quarter comparison due to the lumpiness we tend to see with new bookings.

  • Geographically our Americas region represented 51 percent of our total new bookings, our European region represented 45 percent, and our Asia-Pacific region represented the remaining 4 percent of the total.

  • Our balance sheet remains strong with cash and cash equivalents totaling 2.33 billion at the end of November 2003 -- a decrease of 2.5 million from August 31st, 2003, due to the use of cash for increased share repurchase projection activity and investing activity -- primarily PP&E editions offset by the sourcing of cash from operating cash flows to favorable movement of exchange rate.

  • In addition, debt at November 2003 was 15 (ph) million -- a decrease of 10 million from August 2003.

  • In relation to the August 31st period our unbilled services in client receivables at November 30th increased $176 million and $70 million, respectively, while deferred revenue decreased $18 million over the same period.

  • As a result of this rise in client working capital activity, our days services outstanding or DSO metric increased five days over the August 2003 period to 49 days.

  • Although some of the balance sheet increases were driven from foreign exchange factors again this quarter, we do typically see a seasonal increase in this metric in the first quarter of our fiscal year.

  • Comparatively our DSOs were 50 days in the first-quarter fiscal year 2003.

  • Our partners remain committed to continue capital efficiencies as we move through the year.

  • Free cash flow for the first-quarter -- defined as operating cash flow of 126 million, less property and equipment additions of 47 million -- was 79 million, a decrease of 100 million over the first-quarter of last fiscal year.

  • This decline was primarily due to a $65 (ph) million decline in the changes and assets and liabilities over the same period last year to the increased growth in client balances of $44 million, decreased income tax payables of $99 million due to tax refunds received in the November 2002 period that did not recur during the first-quarter this fiscal year and decreased other current assets of 83 million.

  • This use of operating cash year-over-year was partially offset by increased accrued payroll and related benefit activity of $124 million, resulting from a 13 percent increase in headcount driven from the growth in both the solutions and work services force over the first-quarter of last year and increase other accrued liabilities of $42 million due to prior year outflow of cash associated with certain settlements that do not recur in first-quarter of fiscal 2004.

  • In addition capital expenditures increased $28 million in the first-quarter of fiscal year 2004 over the same quarter last year due to increased infrastructure capital spending to support our solutions work force as well as to increase technology spending.

  • Additionally, our credit ratios and returns continue to lead the industry with first-quarter ROIC of 62 percent for the year.

  • No. 1 when ranked against the S&P 100.

  • ROE and ROA are also industry leading at 68 percent and 17 percent, ranking third and fourth against the S&P 100 companies.

  • Our first-quarter revenue growth of 11 percent in US dollars ranked 28th against the S&P 100 while our GAAP earnings per share ranked 47th against the S&P 100.

  • Additionally our EVA metric adjusted for the reorganization benefit represented 9.3 percent of net revenues for the first-quarter compared with 10.9 percent for the same quarter last year.

  • Our headcount in November 30th, 2003, stood at approximately 86,000 -- an increase of 13 percent over the first-quarter of last year and 3 percent over the August 31st period.

  • We continue to experience growth in our services and solutions work force, approximately 77,000 are billable headcounts and 8300 are support personnel.

  • Our attrition rate in the first-quarter was 15 percent.

  • I also want to provide you with another update.

  • At our November Board of Directors meeting we received authorization for an additional $150 million for the repurchase of Accenture common stock from time to time in the open market as well as authorization of an additional $600 million for our ongoing share management efforts when redeeming and/or acquiring shares held by our partners and/or former partners.

  • Given the closing of our secondary offering in September there have been no additional share management planned transactions for partners in Q1.

  • As business conditions improve we may also consider an additional program in addition to our share management program to grant performance-based equity or options to no net dilutions to public shareholders.

  • Concerning our adoption of EITF 00-21 on September 1, 2003, we have experienced minimal impact so far on new contracts we have signed this quarter.

  • For clarification purposes where revenue recognition is delayed due to 00-21, we will establish an asset on our balance sheet to report certain cost which will be amortized over time, and we will recognize the revenue, costs, and margin as earned through the life of the contract.

  • Through the first-quarter of this fiscal year, the impact has been a reduction of revenue of less than $200,000 as we have generally been successful in structuring contracts to meet the revenue recognition rule.

  • However, this impact will grow over time as contracts evolve and new ones are added.

  • Looking forward, we are in the process of finalizing some new bookings which could have a more significant impact.

  • While we may be able to structure these in final negotiations to minimize the impact we could differ 30 million to 60 million operating income or two to four cents per share over the remainder of the fiscal year.

  • We will provide you updates on the projected impact each quarter as future circumstances could impact these estimates as we move through the year.

  • As I mentioned during our last earnings call we have been reviewing our real estate requirements to help us evaluating and reduce our fixed cost space.

  • Based on the results of this review we expect to take a restructuring charge in the second quarter related to the consolidation of excess real estate fixed space.

  • At this time we anticipate that the total cost of consolidating locations and disposing of related fixed assets will be in the range of $75 to $100 million.

  • This charge represents a net present value of expectation of the cost of abandoning and then subleasing properties in over 25 office locations in over 10 countries around the world.

  • We are not leaving or closing our operations in any metropolitan area but, rather, consolidating within existing locations.

  • We will give you quarter by quarter detail of operating expense savings associated with this transaction so that you can separate the impact from your financial projections.

  • We expect annual operating savings of $20 to $25 million and fiscal year '04 savings of about 8/10ths of a share.

  • This charge is similar to the 111 million charge we took in Q4 of fiscal year '02.

  • Now let me turn to our expectations for the second quarter and the rest of the fiscal year.

  • Reflecting the continued pickup in demand we expect new bookings for the second quarter in the range of $6.5 to $8 billion.

  • This would make our Q2 bookings the highest ever recorded for Accenture.

  • Consulting bookings are expected to be in the 2.5 to 3.0 billion range which when compared to a rolling fourth-quarter average is an increase of 12 to 19 percent over the fourth-quarter ended February 2003.

  • There is the prospect that in this second quarter, our consulting revenues will grow in U.S. dollar terms with local currency growth possibly materializing in the latter half of this fiscal year which would be the first consulting local currency growth since our first full quarter as a public company.

  • While the most important milestone is growth in local currency which would represent a unit volume increase we're heartened to have the momentum of three straight quarters of consulting bookings increase with the tangible prospect of a fourth.

  • We expect net revenues for the second quarter to be in the range of $3.1 to $3.25 billion which would be 10 to 15 percent over the second quarter of last year and earnings per share to come in between 21 and 27 cents, including the 7/10ths of a penny benefit from the lower annual effective tax rate resulting from the reorganization benefit.

  • This range does not include the likely 75 to 100 million real estate restructuring charge and also reflects a conservative lower end of the range as we launch a preserved management flexibility relative to taking interaction or other ways for us to optimize stronger long-term earnings per share and free cash flow trajectory.

  • As we did in the third quarter of last year, when we foreshadowed the EPS impact of a partner's severance action we expect to quickly make up any Q2 shortfall one for one, penny for penny, in either Q3 or Q4.

  • In addition we expect our average diluted shares outstanding to be approximately 1.002 billion or 1 billion and 2 million (ph) shares for the second quarter reflecting the reduction in average share count for the first-quarter as I described earlier to a "normalized" level.

  • In addition, we're still targeting free cash flow to grow 15 percent on a recurring or onetime basis to the 1.3 to 1.5 billion range, although we face some significant challenges to catch up after a less productive first-quarter.

  • December, fortunately, saw unaudited free cash flow grow over $200 million, leaving our cash balance at 2.60 billion at December 31st.

  • Including any future impact of EITF 00-21 we now expect net revenue growth for the full fiscal year to be in a range of eight to 12 percent which is revised upwards from the 5 to 10 percent range we gave at the analyst meeting.

  • We're similarly raising our new bookings target for the full fiscal year to the 18 to 20 billion range from the 16 to $18 billion range.

  • At this time we are again not providing any guidance for earnings per share for fiscal year 2004.

  • As we previously explained, the intent to target variable compensation for our partners and our employees based on an internal management plan of $1.10 earnings per share taking into consideration impact the impact of EITF 00-21.

  • The impact of EITF 00-21 was insignificant for the first-quarter and based on the pipeline of new opportunity, once again, we project it to be in two to four cent range for the full fiscal year as we sign and ramp up contracts.

  • However, as we also previously mentioned our management team and the compensation committee of our board may still need to adjust the $1.10 internal benchmark for accruing variable compensation not only for revised estimates of the impact of the EITF 00-21 but also to properly accommodate a number of nonoperational non-cash items I discussed on this call.

  • As I mentioned earlier, in Q1 we did not accrue any variable compensation and we chose not to include the impact of the benefit from the release of the reorganization liability in deciding whether or not to approve variable compensation.

  • Likewise, we do not expect to factor in the impact of the real estate restructuring charge in the second quarter for variable compensation purposes.

  • We will update you on any revisions of our estimates related to the EITF 00-21 and the real estate restructuring charge as the year unfolds and their implications on our internal benchmark.

  • But for now these estimates make it inappropriate for us to give earnings per share guidance for fiscal year 2004.

  • In reflecting on our final determination for accrued and variable compensation, it is likely that expected operating earnings per share may be further calibrated to reflect our performance comparable to our peers and the S&P 500 -- which plays an important part in how we measure our performance for the year.

  • We want to pay our people competitive compensation and have earnings in cash flow performance that is at least equal to or superior to [indiscernible] as well as the S&P 500.

  • We believe they are increasingly better prospects for us to meet our objective performance as well as the S&P 500 on an operating EPS basis.

  • I understand the limitations of speaking in the context of so many estimates so I want to give you a hypothetical to demonstrate how we might coordinate operational performance with our internal plan for excluding variable compensation.

  • Now please bear with me here.

  • And let's assume in this hypothetical that our GAAP earnings per share for the fiscal year is on track for $1.15 cents per share.

  • If we disregard or reduce an estimated contribution to earnings in the release of reorganization liabilities of 9 cents per share and then we add back an estimated 6 cents per share charged from the real estate net of current year benefit in fiscal year '04 and if the net effect of 00-21 for fiscal year 2004 is a reduction of 4 cents per share at the high end of the range, our operating earnings per share for variable compensation [indiscernible] could approximate $1.12 per share for fiscal year '04.

  • When adjusted for the estimated 4 cent impact for 00-21 the adjusted EPS would approximate $1.19 which would compare to $1.03 per share for fiscal year '03, adjusting for the two cents we disclosed on our last call had 00-21 been in place for fiscal year '02.

  • This difference between $1.03 and $1.19 would represent 16 percent operating earnings growth.

  • Let me look at it on another basis which is on a pro forma adjusted GAAP basis.

  • In this case our EPS approximate $1.21 per share when adding back the real estate restructuring of 6 cents a share and would be approximately 16 (ph) percent -- once again looking at $1.21 over the $1.05 GAAP EPS in fiscal year 2003.

  • Finally, on an S&P core earnings basis, GAAP earnings per share of $1.15 for fiscal year '04 would likely approximate $1.06 per share in core earnings which would be approximately 17 percent over the 90 cents of core earnings per share we reported in fiscal 2003.

  • So under any of three scenarios, estimated growth of roughly 15 to 18 percent in operating earnings would compare favorably to the current outlook of 11 to 12 percent for the S&P 500 operating earnings growth for calendar year '04 and our estimate of peer group operating earnings per share growth of 11 percent which excludes acquisitions and would therefore support any final determination to approve variable compensation for fiscal year '04.

  • The 15 to 18 percent range is also comparable to our 15 percent free cash flow growth targets and the 15 percent EPO [indiscernible] that Accenture has delivered since 2000.

  • With the exception of the three contracts -- which we believe is potentially a positively evolving situation -- we are where we want to be, I think it is remarkable and a testament to our people and to the franchise that is Accenture that we have absorbed the quarterly impact of $100 million of higher pension, health and insurance cost, $200 million of non partner payroll and the $50 million contract under performance.

  • Bookings are up smartly and revenues are increasing in the low double digits.

  • We hope gross margins begin to expand in the second half of the fiscal year and we see the potential as we described last September in our second annual investor and analyst meeting for earnings growth to accelerate in the second half of the fiscal year.

  • Momentum would also appear to be increasingly with us.

  • In the first-quarter we continue to see improvement in our net revenue production performance month by month, which is encouraging.

  • On a net worth day basis for September, our net revenue for net worth day was 52.6 million and increased to 53.2 million on October and 61.4 million in November for a quarterly average of 55.5 million.

  • This also compares favorably to the net worth day production in December which totaled slightly more than 59 million and we expect this trend to continue in the next two months.

  • In addition our volume of chargeable hours for network day for our consulting business in the first-quarter has grown 2 percent over the same quarter last year and is up sequentially by 4 percent over the August 2003 quarter.

  • This is the first-quarter that we have seen an uptick in this metric since the first-quarter of fiscal 2002.

  • So once again, while there is lots of hard work for us still to do, we are increasingly in an even more advantageous [indiscernible] position and a more leveraged operating earnings position for fiscal year '04.

  • Let me turn it back to Joe for some final comments.

  • Joe Forehand - Chairman and CEO

  • Thanks, Harry, and there are two topics that I want to cover before we open our Q&A.

  • First we want to look at our client base and our competitive offerings and, secondly, I want to describe to you how we are positioning ourselves to take advantage of economic recovery.

  • First, let me start with our clients.

  • As our industry continues to consolidate, we're focused on maintaining the strength of our current client base while also developing relationships with new clients.

  • For example, we have 54 clients today compared to 27 clients two years ago where our last 12 months of revenue plus backlog is greater than $100 million.

  • Also, we have 23 new client relationships generating more than $10 million in annual outsourcing revenue at either or below that threshold or didn't exist three years ago.

  • In addition our backlog continues to grow and is significantly higher than at the end of first-quarter last year thus making our business less vulnerable to the volatility of short-term and smaller consulting prices.

  • These achievements are due in large part to our emphasis on sales effectiveness and creating value based offerings based on an understanding of what our clients are looking for.

  • We're bringing the same rigor to the sales process that we have historically brought to building deep industry and process skills.

  • For example we have implemented new sales processes.

  • We've got our senior most executives involved in our largest campaign and we've rolled out sales training for partners and sales executives to continuously improve our ability quite simply to meet our clients' needs.

  • The results of these efforts are encouraging yet we're striving for even greater progress.

  • In fiscal year '03 we completed in August our overall win rate more than doubled.

  • We also decreased the average number of days to close our largest deals by 17 percent.

  • So to summarize the topic of clients we believe we are reaching the right target through effective selling processes and also bringing them relevant and innovative offerings.

  • Also we remain relentless in our delivery of value and exceeding our client's expectations.

  • Let me shift gears in closing and talk about how we are positioning our business for economic recovery.

  • As I look at this, our business has reached a critical inflection point in terms of the transition we have gone through to support the shifting mix of our business to meet our clients' needs.

  • As I said last quarter, we have begun to see volume increases, moderate recovery and some moderate pickup in business and technology spending although it varies by industry and geography.

  • We have also accomplished much of the hardest parts of our transformations although as Harry said we still have work to do.

  • This is evidenced by two quarters of double-digit revenue growth and three strong quarters of new bookings growth.

  • And as Harry indicated, we expect a very strong quarter of Q2 new bookings.

  • Reflecting our strong topline growth in new bookings we have grown our (indiscernible) headcount by approximately 1,000 people each month in the first-quarter, bringing our total headcount to about 86,000 people globally.

  • However, the first half of this fiscal year operating income as Harry said will grow at a slower rate than revenues -- primarily due to the higher volume of outsourcing contracts we signed last year and the related impact of early year margins compression.

  • Also due to the increased cost related to payroll, pension, health-care and insurance.

  • As we have discussed with you before we believe earnings growth will accelerate as the year goes on.

  • Harry spoke about the issues we faced in Q1 from three contracts in the communications and high-tech sector.

  • I am confident we've got the right management processes and forecasting discipline to work through these issues.

  • We will also continue to focus on meeting our clients' standards for satisfaction and quality delivery when we encounter such issues.

  • So although it's still too early to call it a trend, I am pleased to see that demand is increasing while at the same time our strategy has moved into high gear.

  • Overall we are focused on executing our new positioning of high-performance [indiscernible] and the three growth platforms of our strategy and to remind you those three growth platforms are to scale our business consulting capabilities.

  • Secondly, to extend our leadership and its systems integration and technology services and, third, to accelerate our growth in business process outsourcing.

  • In addition we are taking some specific actions to ensure that our business is well-positioned for the coming economic upturn by improving profitability and gain more operating leverage and let me explain each of these.

  • First is pricing.

  • With our utilization improving, and our growth and our billable workforce, we can be more selective about the opportunities we pursue in how we price our services than we've been during the past two years.

  • To address this at the beginning of second quarter we put in place more focused pricing guidelines which we believe will have a positive impact on margins in the coming months.

  • We're tracking the results of these efforts closely and have had anecdotal evidence of our ability to improve pricing.

  • Although it is too early to project the annual impact.

  • We have also been successful in winning some very large-scale complex chain projects that underscore our competitive differentiation.

  • For example we recently won two contracts totaling more than $3.5 billion over ten years to help modernize the UK National Health Service.

  • Accenture will design, build, and manage the information systems to support an estimated 430,000 National Health Service staff and one-third of the citizens of England.

  • The second key action areas around our outsourcing contracts.

  • We recently completed a senior management review of our existing processes and are satisfied that they were because of the sheer size of our outsourcing business after two years of exceptional growth we are, however, creating additional capabilities in each of our operating groups and essentially to manage this high-growth business.

  • Also given the economic recovery, we are possibly saving the risk and financial profile of the deals in the pipelines to reflect the improved demand situation.

  • The final area of focus is SG&A where we have made significant improvements already to reduce our cost structure and create more scalable operations.

  • In two years we have reduced SG&A spending as a percentage of net revenues from 27 to 21 percent.

  • We've also focused on selectively adjusting our services and staffing levels to support our changing business -- both in terms of revenue and workforce mix.

  • While our SG&A -- results are on target our goal is to drive SG&A costs down approximately 20 percent of net revenue in FY '04.

  • Taking into account our FY '04 revenue target.

  • This reflects both the cost management initiatives we have put in place as well as the continued growth of our outsourcing business which inherently has much lower SG&A cost associated with it.

  • Yet we're still investing for the longer-term and it is noteworthy that we have achieved these cost reductions while improving our capability in the number of areas, including one -- investing in new training development.

  • We've opened a new curricula in all of our workforces.

  • Secondly investing in internal technology infrastructure including new financial systems.

  • Third, implementing the sales effectiveness program I mentioned.

  • Fourth investing in infrastructure required to support our global delivery center and fifth, strengthening our internal controls and audit capabilities.

  • So in closing I want to reiterate that we're confident in the relevance of our strategy and the ability to execute from our three growth platforms.

  • In every aspect of our business we continue to be relentless in delivering the value to our clients and enable them to address the challenges they face and become high performance businesses.

  • In the near-term our focus is on consistent executions and with the actions adjust I just described we believe we are well-positioned to capitalize on improving economic conditions.

  • With that, we would be happy to take your questions.

  • Operator

  • David Togut with Morgan Stanley.

  • David Togut - Analyst

  • Thank you very much.

  • Joe, there seems to be some conflicting signals in the first-quarter earnings that you touched on in the call.

  • On the one hand bookings and revenue growth were better-than-expected and on the other young margins will a little light.

  • I am wondering if you could drill down a little bit more depth?

  • First on demand picture especially on the consulting front and the prospects for price increase and then, second, when we might start to see sustained upturn end margins?

  • Joe Forehand - Chairman and CEO

  • David, thank you.

  • Let me address as we look at the demand picture on consulting.

  • I think -- I think clearly as we look at the environment we've been in in the last two years or so much of the consulting work tended to be much smaller projects.

  • Companies did not undertake more of the large-scale change programs that we saw during most of the decade in the '90s, certainly in the latter part of it.

  • We're starting to see that demand pick up as Harry indicated.

  • We think that we could have a very strong uptick in bookings and consulting in Q2.

  • A lot of that is driven, frankly, because there are companies that are spending more capital on new programs, a lot of focus is on how to continue to look at driving revenue growth in the marketplace (indiscernible) our clients and how do you look at doing that after a couple of years of cost reductions?

  • Our ability, frankly, on pricing and what we've done is to put more focus guidelines on pricing our work because we see an environment where if you look at our utilization it's consistently been running in the above 80 percent and our ability to add 1,000 employees per month, we think that there's the right opportunity to begin that effort and we're seeing anecdotal evidence that we are selectively being able to improve the pricing scenario.

  • I think it's to early to see if that's a longer term trend given where we are today.

  • I think -- I think the broader context on your question around the mixed signal positive (ph) booking, the revenue growth and a little lighter on the margins I think we -- as I mentioned -- I think we're at a bit of an inflection point coming out of the downturn and as you look at the success formula that our Company has enjoyed for the last 20 years, it's formula that's reasonably simple.

  • One is we hire the best people in development.

  • Secondly, we ensure that we're willing to change to meet the needs of our clients by jumping if you will to the (indiscernible) for growth.

  • Third, and when we do that we then quickly harden the assets and institutionalize our learning on new growth areas and then, fourth, we don't admire too much of the past success because nothing is handed to you.

  • I think that's the formula that we've seen.

  • We saw it successfully I can recall back as a younger partner when we saw the explosion of online systems we saw the move to client/server.

  • We saw our initial entry in the outsourcing, we saw it with ERP and we saw it with e-commerce and so I think we're at a period where as we look over the last couple of years we've changed our business significantly to again meet what our clients' needs are.

  • Our value propositions against the CEO agenda and ability to deliver outcomes.

  • We've lowered the cost profile of our IT services without sacrificing quality through our solutions workforce and our global delivery center.

  • We continue to look at new innovations through both our labs and our client teams (ph) because we think the winners in our industry are those that continue to innovate and become intellectual property companies.

  • So we also accelerated our business with very high growth in outsourcing and created a new market for BPO.

  • And we undertook massive changes in efficiencies in our cost structure.

  • So I think during this period, we played offense.

  • We skated to where the puck was going to be if you will and I think we're starting to see the results of that trajectory in both revenue and bookings and as I look at this inflection I think I believe we've got most of the hardest work behind us.

  • It's not all [indiscernible] hardest work is behind us on the transformation of our business and that -- coupled with the economic recovery -- I think we have more flexibility now to focus more on day-to-day execution in what we see as a more stable environment for us over the next twelve months [indiscernible].

  • And that would be somewhat lengthy but I think how I look at where we are today.

  • Operator

  • Greg Gold with Goldman Sachs.

  • Gregory Gold - Analyst

  • Harry, there were a lot in the scenarios -- lots and lots of numbers around what the growth should be.

  • But it looks like double-digit, generally, double-digit cash flow growth is what we should be targeting.

  • Correct?

  • Harry You - CFO

  • I think you should look at our goal for the fiscal year is, roughly, 15 percent free cash flow growth and when I went through the example and Carol, David, and I are happy going to further detailed question with any of you after the column.

  • I think when you do apples to apples and you properly isolate some of the onetime impacts we also feel on an operatings earnings per share basis that we could have double-digit results as well.

  • Gregory Gold - Analyst

  • If we were to focus on cash flow growth for the next several years, then, can that kind of growth -- the double-digit growth continue through '04 -- sorry, '05 and beyond?

  • Just conceptually?

  • Harry You - CFO

  • I think conceptually, Greg, we're going to have as we project out in '05 through '05 and '06, and what we will have in '04.

  • Some onetime benefits to free cash flow that could push us into the midteens.

  • I think, beyond that, we are likely to have free cash flow growth be very correlated with long-term topline growth and earnings growth with a caveat that there will be a little more operating leverage from earnings growth as we continue to squeeze out the second and third round of SG&A reduction although not at the pace or scale as what we have done with SG&A over the last couple years.

  • But I think the one thing also that I wouldn't underestimate and certainly (indiscernible) beneficiary -- we have wonderful consultants within our firm who help our clients and we often go to them and we're continuing to look for further working capital and other efficiencies that might stretch out this period of free cash flow upside even further but I certainly can see some good upside through the end of FY '06 on free cash flow.

  • Gregory Gold - Analyst

  • Okay.

  • Just one last question with the slow or lower than expected free cash flow in the November quarter, can you give some thoughts on how you can start to catch up in the February quarter?

  • Should free cash be up year-over-year?

  • Harry You - CFO

  • I think in February we are often as I indicated to a quick start in December and we have a lot of hard work to do.

  • I think, Greg, I once gave you a football analogy and I think in fairness we're about a touchdown down after the first quarter but we see how we can catch up and it clearly means we're going to have to do well in Q2, Q3, and Q4.

  • But we know exactly how we need to get there and we just have to execute but as I said in my last sentence there's still a lot of hard work and I think related to Joe's discussion I think this is a transition point where now optimistic that we're looking at a transition to a better time so we just have to get through the next quarter or two and certainly part of getting through that inflection point should also be some more operating earnings tailwind that might help out free cash flow.

  • Carol Meyer - Managing Partner, Investor Relations

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

  • Operator

  • Adam Frisch with UBS.

  • Adam Frisch - Analyst

  • Harry -- if you could just tie a couple of different things here together for me.

  • First the problem contracts and the unbilled increase in the quarter and then the partner bonus accrual.

  • Could you just go into a little bit more color on the problem contracts?

  • When you expect them to be resolved and when [indiscernible] and then look at partner bonuses [indiscernible] 35 million in the hole already but when things reverse we see catchup in second quarter?

  • Harry You - CFO

  • Let me start in reverse order, Adam.

  • I think we likely will not accrue variable (indiscernible) in second quarter, however, we are striving and I guess increasingly comfortable looking with the bookings trajectory that we have, that we can accrue some significant amount of [indiscernible] second half of the year which is how we really laid out the plans for the year you recall from the analyst meeting.

  • We have these extra payroll costs.

  • I think all of you on the call can appreciate being in professional services firms yourselves.

  • It is better to have more proactive increases than payroll as the economy recovers rather than trying to catch up.

  • When people start to leave for other compare other competitive situations and I'm not saying necessarily that we won't have attrition increases that naturally does in the cycle but we did take a proactive step -- it's 200 million in annualized payroll as Joe mentioned and I mentioned that the pension health and insurance costs are going up and I think the positive side from the first quarter is that even with that extra load we got to almost where we wanted to be on the first quarter.

  • I think over time that issue improves because as Joe mentioned and we mentioned on our analyst meeting, with all of you in New York -- as the year unfolds and we hire the average payroll cost for persons declines as we improve our pyramid so that is going to have a saluatory (ph) effect potentially on margin and tying back to that earlier question why I think we could have some signs for the first time in several quarters of gross margin potentially stabilizing or even going up in Q3, Q4 timeframe.

  • In terms of the free contract, I think it's a bit harsh to call them all problem contracts.

  • I think, as Joe described, we have very close relationships with our clients -- particularly on the larger outsourcing contracts.

  • I think the way you would characterize in each of these three situations is there are factors that have changed that we or our clients did not anticipate at the time the contracts were signed is -- one example is one of the (indiscernible) contracts we actually are at volume levels of the client above the highest ceiling level that we or the client anticipated and we're working to recalibrate -- it's a good thing for the client, it will be, we hope, a good thing for us.

  • But that's still work in progress.

  • The other scenario I described [indiscernible] problem is a bit austere of an adjective is another of the situations is one where we're working to recalibrate the cost estimation model where there are just factors that neither we nor the client estimated.

  • We're working in a very constructive way to see if we can come up with a better estimating model, which could then change what the current financial trajectory is.

  • And the final situation what I'd describe is that as we work through the contract with our client we're learning how we both interpret all the provisions in the contract and this may or may not give a change in the financial results trajectory.

  • So I think, Adam, I think once again problem is a bit too severe.

  • However, I think we hope that we will be on a financial trajectory that is different on these three contracts and, certainly, in all fairness, the financial results for the first quarter for these three contracts were less than we expected.

  • But it's not an immutable (ph) situation.

  • Adam Frisch - Analyst

  • Okay, touching on Joe's inflection point for a second if we take, let's say given the consulting margins increasing because utilization is going on and now you're going to start to try to see if you can get some pricing increases through and etc. (ph) like that.

  • On the outsourcing side you have a lot of new contracts, the big contracts that're lower margin to begin with.

  • When do we start seeing the outsourcing portfolio margin start to stabilize and increase?

  • Has it already started to do that because it seems like it's still kind of the downswing?

  • When does that kind of stabilize and start to move up over time?

  • Joe Forehand - Chairman and CEO

  • Let me comment on that.

  • It's an interesting paradox.

  • The more successful we are at generating sales in outsourcing because most of the outsourcing contracts generally from the first three to five quarters will have depressed gross margins.

  • Everyone of them that we do we have very strict guidelines.

  • We focus on the cash flow over the deal.

  • We focus on the first three years in particular to make sure that the overall EBITs (ph) meets our standard.

  • We put in place very strong look back process with our (indiscernible) committee and that's how we look at these longer term.

  • But the more you'll see outsourcing sales go up when you start to see the outsourcing sales continually be above the consulting sales on a rolling 3 to 4 quarter average.

  • You are going to find more if you will first year outsourcing contracts that go into the portfolio.

  • If you wanted -- if we wanted to optimize gross margins the easiest way to do that would be to stop selling the big outsourcing contracts which is not good for us, our shareholders or what we're up to so I think the way we look at this and why we're so focused on cash flow growth year-over-year is the primary thing that we are trying to look at in running our business and we manage this portfolio just as it is, a portfolio of contracts and if you look at it, we actually looked and annualized by vintage year of the contract and if you look by vintage year the contracts that are year 1 vs. year 2, vs year 3 vs. year 4, vs. year five and you consistently see that same pattern of increasing margins as we go through the [indiscernible] years and so that's the nature of the business.

  • It's good business in terms of meeting our goals of growth and free cash flow.

  • But it will -- depending on our success and selling new outsourcing deals will have a dampening effect, the more we sell on first-year margin we see if you look at our gross margin [indiscernible] .

  • Adam Frisch - Analyst

  • [indiscernible] when does that portfolio reach a critical mass or reach a certain period of maturity where an influx of new deals don't really rattle the [indiscernible] growth portfolio that much?

  • Is that a few quarters away, is that a few years away.

  • (Multiple Speakers)

  • Harry You - CFO

  • Few quarters away but also rest assured I think it's an example within outsourcing is what Jack Wilson and his crew are doing on the BPO areas to relate now that there is critical mass certain of the BPO businesses to be able to consolidate SG&A as well as could be more thoughtful -- not to say we weren't thoughtful before -- but to be more thoughtful in terms of how we get economies of scale and scope now that we do have some critical mass and we can decide more proactively which contracts we'd like to take on that have more immediate economic impact.

  • Adam Frisch - Analyst

  • If I could just ask one more follow-up because I know you have to end the call [indiscernible] 140 million of [indiscernible] you said for health care and pension?

  • That was all accrued this quarter?

  • Harry You - CFO

  • No, it's 100 million annualized data [indiscernible] 25 million this quarter -- was extra payroll 200 million annualized so another 50 this quarter.

  • Adam Frisch - Analyst

  • contracts [indiscernible]

  • Harry You - CFO

  • Yes which -- once again -- we are working earnestly on and I hope will look at it as a timing issue rather than a mutable business or financial issue.

  • Adam Frisch - Analyst

  • So should we be looking at the second-quarter as kind of like the last period I guess the transition period again, keep on going back to that -- it looks like the first half of the year you really gotta prepare yourself for growth, the second half of the year should be much improved from earnings growth perspective and an earnings quality perspective.

  • So we can expect some of these issues to kind of flow into the second-quarter but then an improvement from there?

  • Is that the way you guys are looking at the year?

  • Harry You - CFO

  • Yes, that's how we look at the year, Adam.

  • I think our partners and people have done a phenomenal job to through the downturn just persevering then also getting set up as the global economy improves, there's a real platform of growth consulting side as well as the outsourcing side.

  • Adam Frisch - Analyst

  • Thank you for taking my questions.

  • (MULTIPLE SPEAKERS)

  • Carol Meyer - Managing Partner, Investor Relations

  • (indiscernible)

  • Joe Forehand - Chairman and CEO

  • Okay, let me just finish here.

  • I thank you for your questions in closing.

  • I want to reiterate that all of us on our leadership team, our partners, our people are focused on delivery excellence to our clients in growing our business.

  • I think we're focused on the right areas to gain more operating leverage to continue to focus on looking at increasing our earnings trajectory toward the last half of the year.

  • And as I said earlier, I believe we're extremely well-positioned for longer-term success as our global economy continues to improve so thanks again to each of you for joining us.

  • Operator

  • Thank you.

  • And ladies and gentlemen, that does conclude our conference today.

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