埃森哲 (ACN) 2004 Q4 法說會逐字稿

Good morning, everyone. I'm Carol Meyer. I run IR at Accenture, and thanks for joining us in Boston and as well as those of you who are joining us via webcast for our 2004 annual Investor and Analyst Day. We planned a program this morning that combines our Q4 and '04 earnings results -- that is what we will do first -- as well as some topics that will hopefully let you better understand our strategy, our efforts in selling and what we're seeing in the marketplace and how we are helping our clients become high-performing businesses.

We will start the day with the earnings announcement. Bill Green, who many of you know, assumed his new role as CEO in September. He will lead off, followed by Mike McGrath, our CFO, and Steve Rohleder, our new COO, who will cover the detailed results of our Q4 and '04 performance, as well as our expectations for '05. Then we will do a Q&A panel here, so you can ask questions about the earnings results, and we will take a break.

We will come back roughly around 10:00. The earnings announcements are being webcast and we have also provided you with copies of the slides that will be used during the earnings announcement.

After the break, Tim Breene, who heads Strategy for Accenture, will discuss just that. Joellin Comerford, who many of you also know, who runs our selling efforts, will discuss what we're seeing in the marketplace; and Mark Foster, who is our CEO of our Products Operating Group, will give us some examples of some of the kinds of work that we're doing for clients.

As I move toward the earnings announcement now, let me remind you that as we discuss revenues today, we are talking about revenues before reimbursements. Some of the matters we will discuss on the call are forward-looking. I would like to remind 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 discussed under the risk factors portion of our business section in our annual report 10-K and elsewhere in our most recent filings with the SEC.

Accenture assumes no obligation to update the information presented. Our speakers will reference certain non-GAAP financial measures which we believe provide useful information for investors and we have provided reconciliations to those measures in GAAP on our website at Accenture.com. With that, let me turn it over to Bill.

Thank you, Carol, and good morning to everyone. I am very pleased to be here today in my hometown, which is even better, and to have you here for this earnings announcement and some of the discussions that will go on throughout the day today.

I just want to make a few introductory remarks and then have you -- most of you had a chance to get to know me over the last several years, but I want you to have a chance to get to know and hear from Mike and Steve.

I think if you will go back and look at the year, we feel very good about our outcome. It was an interesting year. It started out to be challenging. We put our minds to it and at the end of the day turned in a result that we are very pleased with. I think importantly from our point of view is double-digit net revenue growth for the quarter and for the fiscal year, and maybe more importantly is the widespread nature of the growth. Very importantly is the double-digit growth across our five operating groups.

And many of you have heard me use the analogy of running on all cylinders, and we are getting there. We have a lot of momentum across each of our units.

Importantly as well is our core Consulting business stabilized and turned to growth. We now have pretty good momentum for the past several quarters in our core consulting business. Pricing has not only stabilized, but some limited pricing power has returned to the marketplace along specific offerings we have, and if you look at the pricing on our new work, we see a positive trend. That is something that we have been looking for for a while.

Our Outsourcing business continues to grow nicely and our BPO business had 51 percent growth, which as you know is one of our important growth platforms for Accenture.

And lastly, a healthy balance sheet, a very strong cash position, industry-leading return on invested capital, and a promising outlook for '05.

There's three priorities that we're focused on as an enterprise right now, and I just want to take a minute and talk to you about these. The first one is about energizing our people. We crossed 100,000 employees this summer. We feel terrific about that, but we are very much a people business, and the energy and passion and enthusiasm of our men and women is essential. And so we have a series of programs underway in the firm that are about clarification of our career paths, outlining of career opportunities to grow across our different workforces. Mike is going to talk to you a little later about some equity programs that we are going to have for our folks.

And importantly, we are a place that our people need to be educated, energized, and inspired. As an example, we just had 4000 of our leadership partners throughout the world come through our training facility in St. Charles, Illinois for the last two weeks, and it has been a phenomenal opportunity to get people together, look at the offerings we have, look at the opportunities we have, and unleash people on the marketplace.

The second agenda we're focused on is driving our high-performance business message in the marketplace. It resonates with clients. It is a powerful differentiator. We have made tremendous progress in differentiating ourselves, putting distance between us and our competitors, and carrying the results-oriented high-performance business message forward. We are going to continue aggressively driving that this year.

And then lastly is simply this -- if we are a company that helps other companies become a high-performance business, we have to be a high-performance business ourselves. And I think you'll see from our results and from some of the things that we have underway is Accenture on its journey to be not only the high-performing company in its sector, but to be one of the world's highest performing companies.

We have four financial objectives, which you know well. We have stated those some time ago. We have stayed the course on those. The current leadership team believes in those objectives. We continue to move forward on those -- outperforming our industry in revenue; expanding our operating margins; achieving double-digit growth in earnings per share; and maintaining our strong balance sheet cash flow position.

We have a plan together for '05. It is a plan that is built from the bottom up. It is a plan that every one of the 100,000 men and women that we have is committed to. It is widely owned and going to be widely and aggressively executed.

So that is just an overview. Let me now introduce Mike McGrath, our Chief Financial Officer.

Thank you, Bill, and good morning. Let me say a special hello to those of you who I have had a chance to meet or reacquaint with over the past few months. It's been a fun couple of months.

I'm going to review with you the financial results for fiscal '04 and provide some additional detail around our press release. When I have done that, Steve Rohleder is going to come up here and talk to you about some of the operational aspects of our '04 results. Steve is going to become a regular member of our quarterly earnings team; I think that has the benefit of allowing you improved access to our management as well as you'll get, I think, some additional perspective on how we see our business.

When Steve has done that, I will be back up here and talk you through two additional topics. One we refer to as our strategic financial architecture and the other has to do with our outlook for fiscal '05.

So with that, let me begin with our fiscal '04 results for the year. We are pleased to report that fiscal '04 was a strong performance. Specifically, net revenues were 13.67 billion, an increase of 16 percent in U.S. dollars, at the higher end of our growth expectations for the year. This is an increase of 9 percent in local currency. In addition, we achieved our financial objective to grow revenue ahead of our industry. We define this as our peer group, which we estimate grew at about 7 percent.

Our revenue growth of 16 percent ranked Accenture 25th against the S&P 100 companies. Consulting revenues represented 63 percent of total net revenues. At $8.59 billion, consulting revenues were up 7 percent in U.S. dollars and flat to local currency, indicating the continuing recovery of our consulting business.

Outsourcing revenues represented 37 percent of total net revenues at $5.08 billion, an increase of 35 percent in U.S. dollars and 28 percent in local currency. Diluted earnings per share were $1.22, an increase of 16 percent and 2 cents above the high end of our expectations. We are pleased to have achieved double-digit EPS growth in fiscal '04. Our EPS growth of 16 percent ranked Accenture 58th against the S&P 100 companies.

Our annual effective tax rate for fiscal 2004 was 32 percent, down from 35.1 percent in fiscal 2003, primarily due to three factors. One is a result of the change in our geographic mix of income. I would note to you that we operate in over 100 tax jurisdictions with widely ranging rates. This allowed us the benefits of prior year tax losses. And thirdly (ph), you will know we had the benefit of some reduction and reorganization reserves throughout the year.

In light of the change to our effective tax rate, as well as our overall strong operating performance, we elected to accrue variable compensation to a level of $277 million. Given this, our earnings per share finished 2 cents above our previously stated expectations.

New bookings reached a record $20.1 billion and represented an increase of 25 percent over fiscal '03. Steve will provide a little more color on bookings in his remarks.

Let me comment on our margins. GAAP operating income for the fiscal year was 1.76 billion, or 12.9 percent of net revenue, representing a growth of 13 percent. As you will recall, we reported fiscal '04 operating margin of 12.9 percent included an expense of $29 million related to restructuring costs net of reorg benefits, which was recorded throughout the year. Absent this item, our operating margin would have been 13.1 percent, compared to 13 percent on the same basis in the prior year.

Gross margin for the year was $4.62 billion, or 33.8 percent of net revenues. This compares to $4.31 billion, or 36.5 percent of net revenues, in the prior year. Adjusted gross margin, which excludes severance costs of $87 million and variable comp of $221 million recorded within our cost of services was 36 percent of net revenue, compared to 37.8 percent for the prior year. The year-over-year decline in gross margin is due to the continued shift in the mix of our business toward outsourcing, as well as a significant increase in variable compensation expense when compared to fiscal 2003.

Let me comment on Q4 results. For the fourth quarter, net revenues were $3.42 billion, an increase of 13 percent in U.S. dollars and 10 percent in local currency. Consulting revenues were 2.14 billion, up 12 percent in U.S. dollars and 8 percent in local currency. Outsourcing revenues were $1.28 billion, representing a growth of 17 percent in U.S. dollars and 13 percent in local currency. Diluted earnings per share for the fourth quarter were 30 cents, an increase of 20 percent.

We accrued $125 million of variable compensation in the fourth quarter. In the fourth quarter last year, we accrued no variable compensation. Operating income for the quarter was $371 million, or 10.8 percent of net revenue, an increase of 6 percent over the prior year. In the interest of time, I'm not going to cover the margin information around the fourth quarter; you will find that posted on our website.

Let me makes a comment that our results are net of the impact of EITF-0021, which we adopted at the beginning of fiscal '04. In the fourth quarter, the impact of EITF-0021 was a reduction of $18 million to revenue and just over 1 cent of EPS. For the full fiscal year, we estimate the impact of this accounting bulletin to be a reduction of $44 million to net revenue, or roughly 3 cents a share. As we move into fiscal '05 and beyond, we will have year-over-year comparables and are no longer going to track this difference.

Let me turn to our balance sheet. Our balance sheet is strong, with cash totaling $2.55 billion, and increase of $138 million year-on-year. We have invested $601 million of our cash into fixed income securities, which are classified as short- and long-term investments on our balance sheet. These combined with our cash total just over $3.1 billion.

Debt at August 31 was $34 million, a decrease of $26 million from the prior year. This decrease reflects a reduction in our local currency borrowings due to the impact of our global liquidity management program. Unbilled services and client receivables increased 266 million and $246 million respectively, while deferred revenues increased $303 million over fiscal '03. These increases are primarily due to growth in our business, as well as FX impact.

Our days services outstanding finished fiscal '04 at 45 days, one day more than the prior year. Our DSOs remain an industry-leading metric. We continue to target the low to mid 40 days, in terms of our overall objective.

With respect to cash flow, we had a strong year with our operating cash flow and free cash flow performance. To remind you, we define free cash flow as operating cash flow less property and equipment additions. Operating cash flow increased by $212 million to 1.76 billion in fiscal 2004. P&E additions totaled $282 million, primarily reflecting investments in our global delivery network and our technology infrastructure. This reflects an increase of $70 million year-on-year. Free cash flow was 1.47 billion, an increase of $141 million, roughly in line with strong income performance.

Demonstrating our solemn commitment to our people, we contributed an additional $125 million to U.S. pension plans in the fourth quarter. That combined with our third quarter contribution totaled $230 million. With this funding, our U.S. employee pension plans are in a modest overfunded position. If we use our GAAP pension expense as a surrogate for normal pension funding levels, we made $143 million of incremental pension contributions in fiscal '04. Excluding this incremental funding, our free cash flow would have been over $1.6 billion.

For the fourth quarter, free cash flow was $291 million, consisting of operating cash flow of $393 million less $102 million of P&E additions. This is an increase of $96 million over the prior year, primarily due to the $125 million of incremental pension funding we did this year.

Let me turn it over to Steve to give you some additional operational color, and I'll come back up when he us finished to talk you through our thoughts on our financial architecture and our business outlook.

Thanks, Mike, and good morning, everyone. My goal in the next few minutes is to take a closer look at some of the stories behind the numbers and to add some perspective and context to our results.

As Bill said, we are very pleased with our results. For the full year, we had net revenue growth in U.S. dollars and local currency in all five of our operating groups and in all three of our geographic regions. These results validate our strategy and demonstrate our ability to help our clients become high-performance businesses.

We also had record-breaking new bookings of $20.1 billion for the year. Twenty-one of those new bookings exceeded $100 million. That is a 25 percent increase in new bookings over fiscal year 2003.

Let's look at some of the highlights from our operating groups and geographic regions for the full year. In financial services, we've got a very positive story to tell. For the full year, revenue in financial services grew 18 percent in U.S. dollars and 9 percent in local currency. Our success was driven mainly by the strength of our business in the UK, primarily in banking and insurance.

In the fourth quarter, Financial Services grew 25 percent in U.S. dollars and 21 percent in local currency. We are seeing signs of recovery in our capital markets business as clients begin to invest again in technology, consulting, and outsourcing.

We also had strong new bookings in Financial Services for the year. We signed a major contract with Barclays for IT application outsourcing. We also signed a BPO agreement with Deutsche Bank to provide purchasing and accounts payable services worldwide. And we entered into a multiyear BPO and IT outsourcing deal with Royal & Sun Alliance to help the company transform its insurance operations in the UK, Ireland, and Canada.

Our Government operating group has grown steadily over the past few years and is now a $2 billion business. Government net revenues for the full year increased 26 percent in U.S. dollars and 20 percent in local currency from a year ago. During the year, our Government operating group teamed up with our Products group to win two major contracts with the UK National Health Service. Together, these contracts are valued at approximately $3 billion. We are helping NHS improve health care for patients in the northeast and eastern regions of England. And Accenture is leading a team of technology companies that will design, build, and manage key information systems to support patient care services. These were significant wins for us in the UK market.

You'll also notice that in the fourth quarter, net revenue for our Government operating group grew 13 percent in U.S. dollars. That is a slower growth rate than in prior quarters this year. Given the upcoming U.S. elections, many of our clients in the state and federal levels have deferred decisions on some contracts to the first and second quarters of fiscal year 2005.

In Communications and High Tech, we achieved net revenues of $3.74 billion. That is a 14 percent growth rate in U.S. dollars and 8 percent in local currency. That is a great performance in an industry that is going through a lot of change. Our growth was particularly strong in Europe. In Norway, for example, we signed an agreement with Tele Nord to provide applications management and development services.

Let me also point out that in the fourth quarter, net revenue for our C&HT operating group was 8 percent in U.S. dollars. That is a slower growth rate than in the previous two quarters. This resulted in part from a substantial reduction in the scope of our work with a major telecom client due to the client's changing strategies. We see the effect of this continuing into fiscal year 2005.

Resources had net revenue of $2.18 billion for the year. That is an increase of 11 percent in U.S. dollars and 3 percent in local currency. We signed a multiyear agreement with Dynegy, a U.S. energy company. This work is mainly in information technology, procurement, human resources, and financial systems. It is being done by one of our BPO businesses, Accenture Business Services for Utilities.

Let me add that in the fourth quarter, net revenue and resources grew 5 percent in U.S. dollars. That is a slower growth rate than in the three prior quarters of the year, and the main contributing factors were slowdowns in the chemicals and utilities industry groups.

Products had net revenues of 2.98 billion, an increase of 14 percent in U.S. dollars and 7 percent in local currency. We recently signed a seven-year agreement with Best Buy for consulting and outsourcing services to support its transformation to a more customer-centric business model. We are also providing Best Buy with HR support. And we signed a multiyear agreement with Diagio to develop, implement, and support its ERP systems on a global basis.

Now for a little different perspective, let's look quickly at performance for the year in our three geographic areas. Our Europe, Middle East and Africa region, or EMEA, is now our largest geographic region, with revenues of 6.57 billion for the year. Specifically, we had strong growth in the UK, France, and Spain. We saw encouraging signs of improvement in Italy and our Nordic countries. We also saw modest recovery in Germany, where we believe there is even more opportunity to improve our market penetration for all of our operating groups.

In our Americas region, net revenues for the fiscal year grew by 8 percent in U.S. dollars and 7 percent in local currency. That is a real improvement when you consider that last year we had a decline of 3 percent in U.S. dollars and 2 percent in local currency. We are encouraged also by the turnaround in U.S. business, where net revenues increased 4 percent for the year compared with a decline of 4 percent in fiscal year 2003.

We are also pleased with the growth of our business in Canada, where net revenues grew 52 percent in U.S. dollars. This growth reflects both the strength of our business and the strength of the Canadian dollar.

Looking at the fourth quarter, net revenues in the Americas grew 1 percent. That is a slower growth rate than in prior quarters, and this is due in large part to slower fourth-quarter growth rates in the Americas for our C&HT and Resources operating groups, and to a lesser extent in our Government operating group. As the economy continues to improve in the U.S., we plan to intensify our focus on improving our consulting business in this important market.

In Asia Pacific, net revenues for the year grew 22 percent in U.S. dollars and 12 percent in local currency. This was largely driven by strong growth in Japan and Australia. In Japan, our net revenue grew 22 percent in U.S. dollars and 11 percent in local currency, and in Australia, our revenues grew 28 percent in U.S. dollars and 8 percent in local currency.

We see even more opportunity for growth in Asia-Pacific. Japan represents a sizable market, about $52 billion. We feel it is underpenetrated and our goal is to gain market share there. We also see great opportunity in China, where the compound annual growth rate for IT services is well ahead of the market.

Now turning to SG&A, we continued to drive considerable efficiencies during the year. SG&A was 2.83 billion for the year, or 20.7 percent of net revenue. This is a 280 basis point decrease compared with fiscal 2003. I am pleased to report that we achieved operational savings in excess of $100 million, and we did this primarily by improving in business by improvements in efficiencies in business development and selling, reducing facilities and technology spending, and streamlining corporate functions, such as procurement and HR. With these improvements, decreases in SG&A are not likely to be sizable going forward. Still, we continue to focus on increasing efficiencies by completing the consolidation programs we began last year and continuing to improve our selling process. Later today, Joellin Comerford will tell you more about high-performance selling model. Our target for fiscal year 2005 is to drive down SG&A to about 20 percent of net revenues.

We had a record-breaking year in utilization, achieving a rate of 84 percent for the year. This is approximately 500 basis points higher than last year, and we continue to see solid utilization on a global basis. We focus on monitoring and managing the pricing of our new work and we are seeing some modest pricing improvement in the new consulting work we're signing in many countries. Given the ramp up in our utilization, we believe we will be able to maintain, if not improve, the pricing we saw in the second half of fiscal year 2004. This will allow us to be more selective in the work we take on.

We also reached a major milestone when our workforce surpassed 100,000 people. At the end of the year, billable headcount was 94,300 and nonbillable was 8700. We hired more than 30,000 people and we had a net increase of 20,000 people. That is a 23 percent increase year-over-year. Our attrition rate was 20 percent at the end of the year, but it is important to remember that, like the economy, attrition is cyclical, so we expect attrition to increase and decrease as economies improve or contract. For example, while our attrition in India is higher than our companywide rate, it is consistent with the attrition rates of our competitors in the local market, where business is growing faster and there is significant demand for IT skills.

We incurred severance costs of $111 million for the year, compared with 161 million last fiscal year. This reflects the work that we did to rightsize our pyramid last year.

Looking ahead to fiscal 2005, we expect to continue to grow our workforce in most of the major markets in the world. And we anticipate an increase of about 20 percent in our workforce by the end of the fiscal year.

Let me add a couple of comments about training and R&D. We are committed to investing in the best training for our people and in R&D, which keeps us at the forefront of innovation. We invested more than $400 million in training during the year. While this is a modest increase from last year, it reflects improved efficiencies in the development and delivery of our training through computer-based programs. And in fact, Accenture people spend 50 percent more time in training than the industry average. We continued our commitment to R&D, investing close to $270 million during the year.

Let me talk briefly about how we stack up against the competition. Each year we track our progress against our major competitors, and as you can see, with 16 percent growth we have substantially outperformed the peer group average of 7 percent in terms of organic net revenue growth. When many of you ask me why our growth rate is much better than the industry average, the answer is very simple. We are able to combine business consulting, systems integration, and outsourcing, and deliver that transformational change at scale, and we are delivering that business across all five of our operating groups and in our 48 markets around the world.

I know you are anxious to hear more about our business outlook for fiscal 2005, so I'll turn the mike back over to Mike.

I want to start with a discussion of what we refer to as our strategic financial architecture and then I'll turn to our business outlook.

We define our strategic financial architecture as having three primary components -- our employee equity programs; our focus on a strong financial position; and the focus on return to shareholders -- and a fourth component in our overall financial infrastructure.

Let me start with the key item in this last area, our financial infrastructure. On September 1, we began our transition to a new SAP-based global accounting and financial system. We have cut over (ph) transaction processing and we continue to roll out new processing throughout the quarter as the accounting cycles move forward. On an overall basis, our program is going well. The implementation and convergence have progressed as we expected, and so far we've been able to deal with the issues that have arisen.

This initiative is one of the largest SAP undertakings of its kind, crossing 48 countries, five operating groups, 18 industry segments, and over 100,000 people. I would like to acknowledge the hard work of our people who have shown solid commitment and dedication to this effort.

Now let me comment on the other components of our overall strategic financial architecture. Firstly, employee equity programs. We are enhancing our employee equity programs. As a kickoff, we intend to grant $170 million of stock options to our highest performing partners in the second or third quarter of fiscal '05. Also, we have recently discussed with our Board an enhanced program for our senior executives to begin in fiscal '06. This program will cover approximately 4000 partners and associate partners and will expand the use of RSUs, vested over time, both as a reward at the time of promotion and to recognize outstanding performance.

The objective of this program is to attract, motivate, and retain the most talented senior executives. We expect the annual incremental cost of this enhanced program to be approximately $80 million in fiscal '06, rising to approximately $200 million in fiscal '08 as the program phases in. We expect our share repurchase activities to be sufficient to offset any dilution due to this program.

Second piece is our overall strong financial position. We continue to generate strong cash flow through solid operations and efficient use of our balance sheet. We have set as a guideline, as a rule of thumb, a minimum cash position which we need, which we believe is sufficient to cover operational and liquidity aspects of 1.5 months of revenue.

Another important component of our overall strong financial position is our share management plan. The new share repurchase authorization announced today will substantially increase the number of shares that we can buy back from our partners as well as our public repurchases. Let me emphasize our IPO share transfer restrictions remain in place.

In the near term, we hope to minimize the need to undertake large market offerings by using a combination of larger share repurchases from partners and former partners, coupled with a lesser number of sales by them directly into the market. In fiscal '06 and beyond, we would like to move toward a policy that provides our partners with the ability to sell or redeem their unrestricted shares like any other shareholder within certain specified limits.

The third component is our focus on a return to shareholders. With respect to the broad question I get a lot, which is, what are you going to do with all that cash, there are really three alternatives as we see it -- M&A, dividends, and share repurchases. Our M&A appetite remains modest and is focused on filling geographic needs and certain go-to-market capabilities. We have decided to defer the decision on a dividend payment until fiscal '06. This decision was made in light of today's buyback announcement as well as in consultation with our Board. At this time we believe that share repurchases are the most efficient way of returning cash to our shareholders.

As outlined in today's news release, our Board of Directors has authorized the repurchase or redemption of up to an additional $3 billion worth of Accenture's shares through our ongoing share management plan transactions and public share repurchases. The authorization requires $1 billion of these funds to be used in connection with our public share repurchase program. The timing and amount of repurchases will be at our discretion and will be based on market and other conditions.

Now let me turn to our business outlook for fiscal '05. For the full year, net revenue growth is expected to be in the range of 9 to 12 percent in U.S. dollars and local currency. This compares to 9 percent local currency growth in fiscal '04. Our expectations at this point assume a flat exchange rate differential between the dollar and our composite local currencies for fiscal '05.

Earnings per share are expected to be in the range of $1.34 to $1.39. Our annual effective tax rate is expected to be in the range of 32 to 34 percent. Let me reiterates this our tax rate expectation for fiscal '05. We are not stating expectations for a tax rate beyond fiscal '05 at this time.

New bookings are expected to be in the range of 18 to 20 billion, which we consider sufficient to drive our revenue plan for '05, and I might add, consider the fact that when our Consulting business recovers, we have shorter cycle between booking and revenue coverage for that component of the business.

Free cash flow is expected to be in the range of 1.45 to 1.65 billion. The earning range above assumes the fiscal '05 variable compensation to be basically in line with the fiscal '04 levels I showed you earlier.

For the first quarter of fiscal '05, we expect net revenues to be in the range of 3.5 to $3.7 billion. We expect EPS to be in the range of 28 to 31 cents. These numbers reflect our assumptions around our compensation increases which went into effect September 1 globally. With that, let me turn the mike over to Carol and open it up for Q&A.

Okay, what will do here while they bring some chairs up to the stage because we are webcasting, we have some folks with a microphone. So if I call on you, if you could pause for a second until someone gives you a microphone so that people who are listening in on line can hear, that would be great. So, here we go. Let's start with David Togut down here in the front row, please.

It looks like the variable comp in the quarter was about 50 million higher than expected. Going forward, how do you balance the need to pay variable comp, keep your best people, and deliver returns to shareholders?

Well, pretty much in the same way we have done it. Variable comp we view as basically a necessity for our people and a buffer on the downside of our earnings. So as we finish out each quarter, we take a look at what we have set our guidance at and make a variable compensation in light of meeting our commitment to the Street.

Greg Gould here in the front row, please.

Thanks. On the pricing issue, where specifically are you seeing the biggest increases or the greatest price of power, and conversely, where are you seeing the biggest dropoffs?

Let me just comment on where we're seeing some of the improvement. It is basically in our commercial sector, in our C&HT and Products areas. We're not seeing a price dropoff, to answer that question directly, but we still are seeing spotty signs of our ability to push the issue with our clients, and frankly, to command a higher price in the consulting area. So it is basically those two areas right now.

Let me just add, if I could, Greg, as most of you know, this has been something we have been very focused on as an enterprise. And first we were looking for stability, which we achieved in the past many quarters. Then we looked very specifically at how do you relate pricing to the kinds and quality and value of the service. And we have done some dissection of that. And so there are certain key offerings that we have that we have become the de facto standard in the industry of providing service on those, and those are the things we are getting the initial pricing power with.

Adam Frisch in the second row, please.

Just two points of clarification and then I have my question. With regard to the quarter, it seemed like the lower tax rate directly offset the variable comps. So I was wondering if you can kind of go through the timing, Mike. In your presentation you said we had a tax break and that let us to accrue more variable comp. I guess I would be more concerned with the quality issue if you had a lower tax rate and variable comp was at budget or below budget, instead of being above budget. Could you go through the time frame of which one came first? That would answer, I think, a lot of the quality issues.

We did have a reduction in tax rate due to the items I mentioned. We had some discussion on how to deal with it, and we made a decision to top off variable compensation by an incremental $40 million more or less, which is sort of in the 3-cent earnings range. And we put 2 cents on top of our top end of our earnings expectations, and we made a decision to slightly skew toward variable comps since fundamentally we haven't paid much variable comp for the last three years and we have a set of partners and employees who drive this place everyday and need to be taken care of.

I would just add, Adam, I think the variable compensation scheme as it is has served our investors well. When we went into this year, the first thing we did is to make sure we lived up to our outside commitments. The second thing we did is to make sure we paid our employees variable comp. And then the last thing we did was make sure that we got any amount of variable comp we could to our partners. I think that was the right balance between the people who invest in our business long-term and the men and women that make it go every day.

Okay. The second point of verification is on revenue growth guidance for next year. Last guidance given was 10 to 15 percent. Now it is 9 to 12 percent. What is the difference? Can you reconcile them or the different assumptions with regard to FX? Because I have in my notes that last time you included 3 percent; now you are saying it's going to be flat.

I think when the guidance was given last time, I'd assumed a 2 to 3 percent FX delta between the dollar and our composite non-dollar currencies. At this point, we're assuming that differential to be flat, so the basic difference is the FX assumption between dollar growth and local currency growth.

I guess my question is profit expansion, margin expansion in '05 -- it seems like in '04, you have had some -- not one time, but expenses that you incurred in '04 but not in '03, whether it be larger pension expenses, obviously variable comp expenses. And now Steve was saying that the SG&A cuts are not going to be as material as they were in the past. So where do you drive margin growth going forward? And is it just now that you have invested in variable comp, those things should flatten out, where now the revenue growth should really take the margins up at this point?

I think there are four areas that I recount (ph) and others can chime in. I think there is some modest room left in the SG&A area. I think the low-hanging fruit has been picked, but I think there is still some surgical work to be done on the SG&A.

Secondly, pricing has firmed, so I think there is pricing expansion that sits in front of us. Thirdly, our BPO portfolio has matured. We have looked at it as recently as yesterday and I think we see a strong portfolio with good margin performance in the year and going forward. So I think the solidity of the BPO backlog of current contracts versus a mix of new contracts will generate a margin uplift as you go through the math (ph). So those are three. Lastly, I think our overall cost in service delivery -- what you would know as cost of services -- has room for improvement, as we deal with methods, processes, and frankly some cost of quality issues that we see in terms of improving our cost of services and expanding our gross margin.

Let's do Dris down here in the second row, please.

Okay, thanks. Could you just elaborate, first of all, on the slowdown in the outsourcing growth that we saw specifically in fourth quarter, down about 20 percent from last quarter? And then also in the Americas as well.

Let me talk about outsourcing. It's obviously off a larger base. We don't measure business consulting, SI, and outsourcing necessarily separately. But on the base, basically we think that the pipeline has to be replenished. We had some lumpiness this year in terms of new bookings. We have now worked our way through that and we need to replenish that pipeline, to be honest with you. And that's, frankly, the basis for the forecast going forward.

In the Americas, I commented on C&HT, Resources, and Government contributing to the factors, and I think the comments were pretty straightforward there. I would also tell you that we're putting a process in place to expand our geographic focus on the U.S. We have a city focus that was started about two years ago and we're going to expand that. Resources specifically has about 10 sales campaigns underway to begin to drive growth in the United States as well. So I think we've seen some slowdown. I think we have taken the action right now to focus on the growth and getting that back on track.

Back over here in the fourth row.

Pat Burton with Smith Barney. Given your comments on the U.S. political environment, would you expect your bookings to be down in the first half of this fiscal year?

Overall, I don't see a tremendous dip because of the elections. Our government business is a large portion of our U.S. business. As I commented, what we're seeing right now is a small dip because of the deferral of some of those bookings. But quite frankly, what we're going to see is once we get past the election, the latter part of Q1 and Q2, we will see more of that begin to pick up.

I would just add to that, if I could, we see more activity right now than we have seen in the years. Interestingly, we feel very comfortable about our growth across our three growth platforms, and it is very important to our anatomy that we drive each of those platforms aggressively. And we feel good about the balance that the growth is in right now, particularly with the return of Consulting.

Interestingly, if you look at the pipeline, there is a greater number of smaller and medium-sized outsourcing opportunities that fill the pipeline. So all that is going to have some dynamics with how the growth manifests itself. I think more stability, but less of the -- it's still going to be lumpy, but less of every once in a while, one big giant win. There is a lot more activity in the small- to medium-sized marketplace.

One follow-up. Within the 18 to 20 billion guidance, what would the outlook be for Outsourcing and Consulting? Thanks.

It would be roughly the same as the revenue mix, which is, in the roundest of numbers, one-third, two-thirds.

In the interest of trying to finish before the top of the hour, let me take one more question and then maybe we'll have a few closing remarks from Bill. Let's just come down the second row.

Bryan Keane from Prudential. I didn't get -- the bookings number of 4 billion, what was a split there between Consulting and Outsourcing?

I think it was slightly weighted toward Outsourcing. I don't recall the exact numbers, but it was slightly weighted toward the Outsourcing side.

Okay. In the consulting market in general, have you seen any weakness with some weakness in the tech market, or do you still see that being firm and growing exponentially higher going into fiscal year '05?

I think it's steady to increase. The deferral of capital spending in the tech market I don't think has impacted our business. Frankly, as companies are beginning to put more "bet your business" kind of initiatives in place, we are the people that they are coming to to perform that work, regardless of their capital expenditures.

I think being thoughtful about it, we see high single digit growth in the core Consulting business, which is the first time in a long time, and we're very pleased about it.

Okay, this would draw the earnings announcement portion of our agenda to a close. Any last comments you would like to make?

No. I would only make this comment -- that you're sitting there looking at three folks that are new in their roles. Collectively close to 100 years of experience with this enterprise, though. I would like to acknowledge Joe Forehand for the fine shape he has left this enterprise in, for the very smooth transition, and for feeling good about a very bright outlook for our Company. Thank you, Joe.

There will be plenty of time for Q&A later. We have another panel discussion scheduled. So let's come back at a quarter to 10, please. Thank you very much.