埃森哲 (ACN) 2005 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to Accenture's first quarter fiscal year 2005 earnings conference call.

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

  • If you would like to ask a question during today's conference please depress star, then 1 on your touch-tone phone.

  • You may withdraw your request from this queue at any time by depressing the pound key.

  • And as a reminder this conference call is being recorded.

  • I'd now like to turn the conference over to the managing partner of Investor Relations, Carol Meyer.

  • Please go ahead.

  • Carol Meyer - Managing Partner, IR

  • Thank you operator and thanks everyone for joining us today on our first quarter fiscal year 2005 earnings announcement.

  • With me this afternoon are Bill Green, our Chief Executive Officer, Mike McGrath, our CFO, and Steve Rohleder, our COO.

  • I hope you've had an opportunity to review the news release we issued just a short while ago.

  • Let me quickly give you the agenda for today's call.

  • Bill will begin with an overview of our results and describe some of the trends we are seeing in our business.

  • Mike will then take you through the results in more detail and Steve will add some operational perspective.

  • Mike will then discuss our business outlook for the second quarter and the full fiscal year 2005, then we'll open up the call for questions.

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

  • Some of the matters we will discuss on the 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 obligation to update the information presented on this call but during the call today our speakers may 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 the Investor Relations page of our Web site at Accenture.com.

  • Now let me turn it over to Bill.

  • Bill Green - CEO

  • Thank you Carol and good afternoon to everyone.

  • Before I begin I just want to take a moment and say how deeply saddened we are by the recent tragedy in Asia.

  • I know I speak for everyone at Accenture in saying that our thoughts are with all of those who were affected We have reviewed our operations in the affected areas and there are no disruptions to our business.

  • More important Accenture and our people around the world are making contributions to help in the relief effort and I want to personally thank each and every one of the Accenture people for their support.

  • Looking now at our results we're very pleased with our strong performance in the first quarter of FY '05.

  • We have had net revenues of 3.73 billion, the highest in Accenture's history.

  • That represents a year-over-year increase in revenue of 14% in U.S. dollars and 9% in local currency.

  • Diluted earnings per share were 32 cents for the first quarter, ahead of our expectations of 28 to 31cents.

  • EPS growth was 22% year-over-year, excluding a 6-cent benefit from an $86 million reduction in our reorganization liabilities in the first quarter of the last fiscal year, and the $7 million reorganization expense in the first quarter of this year.

  • Now, let me give you some perspective on our growth.

  • We achieved U.S. dollar revenue growth across all 5 of our operating groups and all 3 of our geographic regions, with exceptional top-line performance from our financial services and our products operating groups.

  • We are pleased with the momentum we're seeing in our consulting business.

  • Our consulting revenues reached $2.4 billion for the quarter, or 64% of our net revenues.

  • That represents a year-over-year increase of 14% in U.S. dollars and 8% in local currency.

  • As you know our consulting business has been the seed bed for our important long-term client relationships.

  • That's the strongest year-over-year consulting growth we have achieved since becoming a public Company in 2001.

  • Outsourcing accounted for 1.3 billion, or 36% of net revenues.

  • A year-over-year increase of 15% in U.S. dollars and 10% in local currency.

  • As we said before, while outsourcing will continue to deliver solid growth to our business this year it is likely to grow at a slower overall rate than it did in 2004.

  • Mike will discuss our income statement, balance sheet, and cash flow in detail.

  • But I'd like to take a few minutes to comment on the business environment, our pipeline, and new bookings.

  • Looking at the overall business environment as the economy improves the demand for our services continues to grow.

  • We are encouraged by the strength of our pipeline which is up about a third from the end of the fiscal year.

  • Now let me turn to new bookings we have delivered in the first quarter.

  • New bookings for the quarter were 4.03 billion, split roughly 50/50 between consulting and outsourcing.

  • We have seen a decrease in the average size of the outsourcing contracts that we are booking and we saw more mid-sized contracts in the quarter.

  • To give you some perspective 6 of our wins in the first quarter were in the range of 100 to 225 million. 8 were in the range of 50 million to 100 million.

  • The decrease in the average size of our outsourcing contracts and the level of activity that we are seeing indicates widespread adoption of outsourcing by companies of all sizes and across different functional areas and geographies.

  • Let me also say a few words about our people, this is an important area of focus for me and one of my strategic priorities.

  • You've heard me say that we are in the people business.

  • And our success depends on our ongoing ability to attract and retain the very best people to serve our clients.

  • I am pleased to say that our attrition rate has stabilized for the quarter and we continue to be able to attract the very best talent in the marketplace.

  • Both of these factors are critical to our ability to achieve net headcount growth in the range of 15 to 20% for the fiscal year 2005.

  • To summarize, I think our results for the first quarter of '05 demonstrate that we continue to deliver on our strategy of taking a results-oriented approach to helping our clients become high performance businesses.

  • This is a powerful differentiator for Accenture in the marketplace.

  • We still compete in a wide range of global markets of varying complexity and competitiveness.

  • Our strategy of defending and extending continues to be very effective.

  • We are successfully defending our consulting and high impact systems integration business while at the same time extending our ability to deliver differentiated, innovative, high-value services to the world's largest companies.

  • And at its core the work we do for clients is about transformation.

  • And when it comes to transformation, Accenture is in a category of one.

  • We have set the standard for transformation and we will continue to do so.

  • We continue to build a unique position in the marketplace, a position where our competitors can't go or choose not to go.

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

  • Mike McGrath - CFO

  • Thanks, Bill, and good afternoon.

  • I think the best way to characterize the quarter overall is one in which we delivered strong top-line and bottom-line results coupled with a few operational issues.

  • We had solid net revenue growth in both consulting and outsourcing and we continue to fill our pipeline.

  • At the same time we see opportunities for improvement around operating margins, days services outstanding, or DSOs, and the impact on free cash flow.

  • I'll touch on these in a minute but first let me walk you through our income statement, balance sheet, and cash flow in more detail.

  • Net revenues were 3.7 billion for the first quarter compared with 3.3 billion for the first quarter last year.

  • This represents an increase of 14% in U.S. dollars and 9% in local currency.

  • This U.S. dollar increase is well ahead of our peer group average of 9% and ranks Accenture 33rd against S&P 100 companies in terms of net revenue growth.

  • Gross margin was 33% compared with 34.1% for the first quarter last year.

  • Two key factors were the primary contributors to the 110-basis-point decline.

  • First, as mentioned in October we implemented higher compensation increases on September 1, than we have in prior years.

  • As we told you we expect to absorb these compensation increases over the course of the full fiscal year.

  • Second, we incurred higher labor costs in the quarter due to some short-term staffing inefficiencies in meeting the increased demand for our services.

  • Steve will discuss the actions we are taking to address this issue.

  • For the first quarter SG&A costs were $765 million or 20.5% of net revenues compared with $690 million, or 21.2% of net revenues last year.

  • Our improved efficiencies and strong cost management resulted in this year-over-year reduction of 70 basis points.

  • We continue to focus on our goal of reducing SG&A costs to approximately 20% of net revenues for the year.

  • Based on bottom-line results we accrued variable compensation expense of $47 million in the quarter.

  • In the first quarter last year we accrued no variable compensation and reversed $4 million of previously accrued variable compensation.

  • As we have said for the year we expect to accrue a variable compensation amount consistent with last year.

  • If you're following along the income statement, that will remind you about the treatment of reorganization liabilities that were established in connection with Accenture's transition to corporate structure in 2001.

  • From time to time when final determinations are made and payments vary from our expectations we have increases or reductions in these liabilities.

  • As these occur, they affect our operating income, income before minority interest, and EPS in the quarter.

  • These variations also affect our year-over-year comparisons.

  • In addition, there's an ongoing interest expense associated with carrying these liabilities on our balance sheet.

  • Changes in liabilities and related interest expense are reported in the reorganization costs and benefit line on our income statement.

  • During the first quarter last year we had an $86 million reduction in reorganization liabilities.

  • In the first quarter this year we recorded a $7 million reorganization expense related to the interest on the remaining liabilities.

  • With this in mind, let's look at operating income.

  • For the first quarter of fiscal 2005, our operating income was $458 million, or 12.3% of net revenues.

  • Compared with $507 million, or 15.5% of net revenues for the first quarter last year.

  • Excluding the prior year benefit from the $86 million reduction in reorganization liabilities I just noted operating income for the first quarter of last year was $421 million, or 12.9% of net revenues.

  • On the same basis excluding the $7 million reorganization expense for this year operating income for the quarter was $465 million, or 12.5% of net revenues, a reduction of 40 basis points.

  • We do not believe margins in the first quarter are indicative of where our margins will be for the full fiscal year.

  • Maintaining or expanding our operating margins year-over-year continues to be a key financial objective for us.

  • Our effective tax rate for the quarter was 34% in line with our expectations.

  • Income before minority interest was $320 million for the quarter compared with $335 million last year, excluding the $64 million after-tax benefit associated with the $86 million reduction of reorganization liabilities that I mentioned earlier, income before minority interest in the first quarter of last year was $271 million.

  • On a comparable basis and net of reorganization benefits and costs income before minority interest increased $53 million year-over-year.

  • Diluted earnings per share for the quarter were 32 cents.

  • Excluding reorganization costs and benefits EPS growth was 22% year-over-year on a comparable basis.

  • The detailed calculations are attached in the table to the news release.

  • Our balance sheet remains strong.

  • At November 30, 2004, our cash balance was $2.3 billion compared with 2.6 billion at August 31, 2004.

  • We continued to invest portions of our cash balances in short and long-term fixed income securities to enhance our interest yield.

  • Short and long-term fixed income securities increased from $601million at August 31 to $939 million at November 30th.

  • Cash combined with fixed income securities was 3.21 billion at November 30, compared with 3.15 billion at August 31, an increase of $60 million.

  • Client balances which are comprised of current and noncurrent unbilled services, receivables from clients, and deferred revenues, increased $649 million since August 31, to 2.59 billion at the end of the current quarter.

  • Our DSOs were 55 for the first quarter of this fiscal year which compares to 49 days in the first quarter last year and 50 days in the first quarter of fiscal 2003.

  • While we have historically seen a seasonal uptick in DSOs in the first quarter there were other contributing factors that drove the 6 day year-over-year increase. 2 days were due to approved higher client financing associated with a small number of contracts signed in 2004. 2 days were due to a shift in the mix of work to Europe and Asia where payment cycles are longer.

  • The remaining 2 days were in unbilled services where we had a higher amortization of prepayments and some temporary delays in billings.

  • As a part of our conversion to our new financial system we conducted a comprehensive review of the majority of our contracts.

  • Based on that review we remain confident that the client balances are fully collectible.

  • We have made billing and collecting a top priority for executives and we expect to see some improvement in the second quarter.

  • Our objective for DSOs is to be at 49 days or better by the end of the second quarter.

  • Turning now to cash flow, we had negative free cash flow of $116 million in the first quarter.

  • This was comprised of operating cash flow of negative $61million, less property and equipment additions of $55 million.

  • Free cash flow was reduced by the planned payout of $216 million of accrued variable compensation and the increases in client balances I mentioned earlier, partly offsetting these decreases are free cash flow benefited from strong income generation as well as increases in accounts payable and other noncurrent liabilities.

  • As we have said in the past maintaining strong cash flow on a strong balance sheet continues to be 1 of our 4 financial objectives.

  • Total debt at November 30, 2004, was $40 million compared with 34 million at August 31, 2004.

  • Despite the operational items I mentioned our balance sheet metrics continued to be among the best in the industry.

  • Return on invested capital was 48% in the first quarter ranking Accenture second against S&P 100 companies.

  • Return on equity was 51% ranking us 6th against S&P 100 companies.

  • Return on assets was 15% ranking us 12th, again, against the S&P 100.

  • Before I turn it over to Steve I want to update you on some of the developments in our strategic financial architecture.

  • I'll comment first on our share repurchase activities.

  • Let me remind you of 2 things.

  • As we have said, we do not expect to conduct any further large marketed secondary offerings and we are not changing the terms of the transfer restrictions on our partners' shares.

  • As you recall in October we announced an additional share repurchase authorization of $3 billion.

  • During the first quarter we repurchased approximately 1.6 million shares with a value of $39 million.

  • As of November 30, 2004, we had approximately 3.25 billion of total repurchase authority remaining.

  • Of that, approximately 1 billion is earmarked for open market purchases, and the remainder for purchases from our partners and former partners.

  • For the balance of fiscal year 2005, we expect to continue quarterly share management plan repurchases and redemption.

  • We expect these transactions will be larger than in the past and include shares that come unrestricted in July 2005.

  • During the remainder of the fiscal year in total we expect to repurchase from 1.25 to $1.75 billion.

  • The actual amounts will depend on the participation of our partners in the quarterly transactions.

  • We expect these repurchases to occur roughly pro rata over the 3 remaining quarters.

  • We have factored into our EPS outlook for the full fiscal year a 2-cent benefit associated with our expected share repurchases through the remainder of the fiscal year.

  • As you know, the FASB recently passed a revision to FAS 123 requiring the expensing of stock options.

  • We will adopt this new standard on September 1, which is the start of our next fiscal year and from that point on stock option expense will be recorded in our income statement.

  • As previously disclosed we plan to award up to $170 million of stock options to our highest performing partners.

  • We intend to grant these options in the second quarter.

  • They will vest over 3 years with the first vesting on August 31, 2005.

  • Assuming that continuation of current programs together with this award our preliminary estimates for stock option expense in fiscal year 2006 is in the range between $155 million and $175 million which is broadly comparable to the pro forma expense we have disclosed in our footnotes in prior years.

  • Before I provide you with our business outlook for the second quarter and the full fiscal year I'm going to turn you over to Steve Rohleder for some more details on operations.

  • Steve Rohleder - COO

  • Thanks, Mike, and good afternoon, everyone.

  • I want to cover 3 areas with you today.

  • First, I'll comment on the performance of our operating groups.

  • Second, I'd like to give you some perspective on the growth in our geographic regions, and finally I want to talk about our operations and discuss some of the actions we're taking to address key areas of our business.

  • Let me start by commenting briefly on our operating group performance.

  • The drivers of our operating group net revenue performance are outlined in the news release, but it's noteworthy to call attention to financial services and products, both of which had an outstanding revenue growth of 25% and 23% respectively.

  • From an operating income perspective, we did experience year-over-year declines in our government and products operating groups which can be attributed to lower margins in the early stages of several large contracts.

  • However, we were very pleased that communications in high-tech and financial services delivered significant year-over-year increases when adjusted for the impact of reorganization benefit mentioned earlier.

  • It's important to remember that the diversity of our business provides stability in achieving our results over business and economic cycles.

  • Now let's look at our geographic regions.

  • In Europe, Middle East, and Africa, or EMEA, our net revenue growth was 24% in U.S. dollars and 12% in local currency.

  • This growth was driven by outstanding growth in the U.K. which grew 50% in U.S. dollars and 36% in local currency.

  • We also had strong growth in U.S. dollars across continental Europe and I'm particularly pleased that we had double-digit growth in Germany.

  • In the Americas, net revenues increased 3% in U.S. dollars and local currency.

  • Since the United States is the largest country in our Americas region, we continue to intensify our focus in this market through our Grow America program.

  • This program has 3 key initiatives.

  • First, our sales process has been enhanced to ensure that we have the most effective skills and capabilities on our top 15 largest opportunities.

  • Second, we've modified our operational staffing processes to better align our people with local market and specific client needs.

  • And third, we are intensifying our leadership focus around 6 key U.S. markets to maximize penetration and increase market share.

  • Through these actions our goal is to continue to improve our growth in the U.S. market.

  • In Asia Pacific net revenues grew 23% in U.S. dollars and 19% in local currency year-over-year, led by Australia with 43% growth in U.S. dollars and 32% in local currency.

  • Japan also grew 19% in U.S. dollars and 15% in local currency, and we continue to see significant opportunities for growth in our Asia Pacific region.

  • Now let's turn to operations.

  • To understand our margins, we need to talk about the intersection of a number of key business factors.

  • We're pleased to see the demand for our business has picked up.

  • We're also seeing evidence of improved pricing in both consulting and outsourcing.

  • Our utilization was at 85% for the first quarter, up 140 basis points from the end of fiscal year 2004.

  • We're particularly pleased that attrition has stabilized at 20%, especially in our larger markets such as the U.S. and the U.K. as well as in our consulting work force.

  • We continue to focus, however, on driving down the attrition to the high teens.

  • Our infrastructure of people related processes has had to adjust to the uptick in business demand.

  • Now, the combination of these factors has resulted in temporary staffing inefficiencies that show up in our income statement as an increase in cost of services.

  • Let me tell you what we're doing to address the staffing inefficiencies.

  • We have identified the key resource gaps in our business and we've instituted a 30-day review of all new contracts over $50 million to ensure staffing compliance.

  • We have a senior executive in each one of our operating groups focused on integration of sales and revenue forecasting, resource planning, recruiting, and scheduling.

  • We've identified the U.S. as the market with the most critical shortage and we've taken a number of steps to address this.

  • We are conducting a continuous review of consulting demand to determine that we have the right resource mix and we've reduced the recruiting cycle time by approximately 35%.

  • We've also increased our recruiting resources by 10%.

  • As a result, recruiting actuals are running 30% higher through the first quarter year-over-year.

  • And our headcount at the end of the first quarter was just over 106,000 people, a net increase of approximately 3,000 people.

  • In summary, we believe these actions will help reduce this temporary spike in the cost of services and we're confident that we will achieve our margin targets for the fiscal year.

  • Now I'll turn it back over to Mike.

  • Mike McGrath - CFO

  • Thanks, Steve.

  • Turning now to our business outlook, for the second quarter of fiscal year 2005 we expect net revenues to be in the range of 3.6 to $3.75 billion and diluted earnings per share to be in the range of 33 to 35 cents.

  • Diluted earnings per share for the second quarter of fiscal year 2005 will include a benefit of 3 cents a share from a $41million reduction in reorganization liabilities which were recorded in December.

  • For the full fiscal year we now expect net revenue growth to be in the range of 13 to 16% in U.S. dollars and continue to expect a range of 9 to 12% in local currency.

  • Diluted earnings per share are expected to be in the range of $1.41 to $1.46.

  • Diluted earnings per share for the full fiscal year will include a full-year benefit of 4 cents a share from the reduction in reorganization liabilities and as noted earlier 2 cents per share for expected share repurchase activities.

  • Consistent with the prior guidance we expect our annual effective tax rate for the fiscal year to be in the range of 32 to 34%, operating cash flow to be 1.85 to $2.05 billion, property and equipment additions to be $400 million and free cash flow to be in the range of 1.45 to $1.65 billion.

  • We continue to target new bookings for the full fiscal year in the range of 18 to $20 billion.

  • In summary, while we are committed to addressing the operational items mentioned, we are well positioned to continue to grow our business and to meet our objectives for the full fiscal year.

  • Thank you and with that let me turn it back to Carol who will open the call for Q&A.

  • Carol Meyer - Managing Partner, IR

  • Thanks Mike.

  • All right operator, I think we're ready to take some questions, please.

  • Operator

  • Our first question comes from the line of Adam Frisch from UBS.

  • Please go ahead.

  • Adam Frisch - Analyst

  • Thanks, good afternoon, guys.

  • Just on the margin front, excluding the issues, Mike, that you spoke to in the November '03 quarter, margins were still down a little bit.

  • I guess if you could kind of quantify the staffing inefficiencies, that impact, and also kind of comment on given the convergence in growth rates between consulting and outsourcing should we expect to see year-over-year margin comps get more positive as we go through the year or are there other factors that we should consider?

  • Mike McGrath - CFO

  • I think there are factors that can go both ways as we've talked in terms of the up side down side around our margin picture overall.

  • We continue to target for the full fiscal year a number in excess of where we winded up last year, which was around 13%.

  • We expected that to be lumpy with respect to the quarterization of that number and I believe our target for the first quarter was something slightly less than 13 and we came in under that for the reason cited.

  • One, which was the absorption of the payroll increases and two was the staffing inefficiencies.

  • So I think we're probably looking to -- it's hard to give an exact number on that but we're probably looking at some number that would have been in the range of, you know, 30 to $50 million in that space would be my input on that to you.

  • As far as a full-year outlook, I think the biggest leverage we have in our margins is to address the cost of services, both in fixing, if you will, recategorizing inefficiencies as well as driving some systemic change through reducing cost of services through a number of things which include an improved quality program, improved methodologies and the like.

  • Adam Frisch - Analyst

  • Okay.

  • Thanks for that color.

  • And second question is on pricing.

  • Over the next few quarters, what do you think is going to happen to pricing, and what key industry data points do you think are most important in tracking this metric?

  • Mike McGrath - CFO

  • Well, let me start and Steve can weigh in here as well.

  • One thing which I think is good news is as we look at our new business we continue to see for the most part new deals being priced at our target margins.

  • So we believe that we were able to achieve our price point in the marketplace, and to reiterate, the problem we had in the quarter was a confluence of sort of the demand, the high degree of utilization, some degree of turnover, in terms of causing a cost of services spike, i.e. an inefficiency.

  • The thing I look at in terms of price points is whether or not our new deals, particularly the large ones that come through our capital committee, are being priced to achieve our target margins.

  • Steve Rohleder - COO

  • Yeah, Adam this is Steve.

  • Just to add to what Mike said, I think the key point from this quarter is that we've actually seen hard evidence that we are able to hold the pricing increases in both consulting and outsourcing on our arranged deals.

  • The key obviously, as we commented in the discussion here, is around making sure that we're executing, getting the right staff to the right job at the right time.

  • Adam Frisch - Analyst

  • Okay.

  • Got it.

  • Final question.

  • I know the month of January, we're only a few days into it, but it's a key month in our view in terms of assessing how the first half of the calendar year might shape up.

  • Are you seeing anything in your conversations with clients in December or so far this month about how you think January is going to shape up and what that tells you about the next 6 months' operating environment?

  • Mike McGrath - CFO

  • Adam, we've announced a couple of deals but it's been our policy with the input from you folks actually to not comment on the current quarter so I'm going to pass on that.

  • Adam Frisch - Analyst

  • Okay.

  • Bill Green - CEO

  • Adam this is Bill, I would just add, I mentioned in my remarks activity in our business, and our pipeline expanding.

  • Up a third since the end of '04, which is exciting to us.

  • And, you know, you obviously have to be selective, you've got to find the right things, you've got to get them done, get them closed, but just as a data point I would give you that pipeline level and activity hopefully produces the yield in the downstream months.

  • So that's what we're working off of right now.

  • Adam Frisch - Analyst

  • Okay.

  • Great, Bill, thanks for that.

  • Carol Meyer - Managing Partner, IR

  • Next question, please, operator.

  • Operator

  • Very good.

  • It's from the line of Greg Gould from Goldman Sachs.

  • Please go ahead.

  • Greg Gould - Analyst

  • Thanks.

  • I wanted to understand the mechanics around the share buyback and the increased equity grants.

  • By buying back 1.25 and 1.75 billion it looks like, in share value, that is accretive on an annual basis by about 8 to 11 cents a share.

  • Is that right?

  • Mike McGrath - CFO

  • I think that's right if you had that in place at the beginning of the fiscal year.

  • Greg Gould - Analyst

  • Right.

  • Now, with the option grants, that's 155 to 175 million.

  • When you adjust for both of those, what does -- and I know you don't want to comment about fiscal '06 yet, but it seems like it's incrementally a little dilutive if you put the two together.

  • Is that right?

  • When you start expensing the options would we look for slower net income growth, or earnings growth, than, I guess, operating income growth?

  • Mike McGrath - CFO

  • Over time the answer to that question is no.

  • What we will see a period, and I'm not going to get into '06 obviously, but we will see a period where we have to absorb the expense of the options and have, you know, a year if not two of some pause in momentum in terms of the growth cycle.

  • Greg Gould - Analyst

  • Okay.

  • Secondly, on the bookings outlook and the sales pipeline you mentioned that the pipeline is up a third from the end of August, but you're retaining the 18 to 20 billion bookings target?

  • Mike McGrath - CFO

  • Yeah, you know, I want to see the thing yield during the second quarter, to be perfectly direct about it.

  • As I had mentioned in October there's a lot of activity in the business.

  • That activity has converted itself into the pipeline, and now we've got to get the pipeline to convert itself into sales.

  • And until we get a little more momentum and a little further into the second quarter, you know, our choice was to stay the course on our 18 to 20.

  • Greg Gould - Analyst

  • Okay.

  • But if the deal sizes are smaller they probably start to yield quicker, is that right?

  • Mike McGrath - CFO

  • Yes, that's exactly right.

  • If you look at the average sales cycle it is down, and that's important to us, and I think there's, you know, enough momentum in there that, there aren't things in there that have been in there for nine months.

  • There are companies that have made a decision they're going to do something, they're going through a diligent process of choosing who they're going to do it with, and that's what we're working through.

  • Greg Gould - Analyst

  • Sorry, if I could sneak one last question in, the net headcount growth you're targeting is 15 to 20%for this year.

  • Can you sort of break that out between the low-cost countries, the off shore delivery model versus the traditional folks?

  • Steve Rohleder - COO

  • This is Steve, Greg.

  • It'd be tough to segment it out.

  • I can tell you that in the first quarter we hired about 9,000 people and it was broken about a third, a third, a third between our consulting work force, our solutions work force, and services, but projecting that out is going to be a little bit more difficult.

  • Greg Gould - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Our next question is from David Togut from Morgan Stanley.

  • Please go ahead.

  • David Togut - Analyst

  • Thank you.

  • You mentioned the increase in the pipeline of one third sequentially.

  • Could you drill down on a bit on that and give us a sense of where the increases are coming both geographically and from a service line standpoint?

  • Bill Green - CEO

  • Let me try to give you -- there's a lot of moving parts in here but I'll try to give you a quick view.

  • First of all would be just looking at the outsourcing business.

  • There's a lot of people focused on outsourcing of specific functional areas, instead of the whole nine yards, but a very specific area around accounting and finance.

  • There's a lot of momentum around the HR space, there's a lot of momentum around -- and these are companies that may be mid-size to large companies but not giant companies.

  • So you get a sizing question there.

  • I think in the core consulting business, our merger integration work continues to go very well.

  • We have a lot of opportunities in the supply chain space that have continued to come up.

  • The customer service area has not lost any of the momentum that it had had.

  • And then I think, importantly, and just around, Steve mentioned some actions we have on the United States.

  • Europe he has just been terrific for us.

  • Really, across the countries we were a little worried about some of the Latin countries 6 to 9 months ago.

  • That hasn't come to be an issue.

  • If you look at our business in a place like Italy and Greece and they serve some of the other central European countries we passed the billion in revenue, 7,000 people over there.

  • So a lot of those places around the world there's just terrific momentum and frankly a lot of those countries we haven't a tremendous franchise, so as those countries grow we continue to get the benefit of that.

  • Steve Rohleder - COO

  • David, this is Steve, just to add to that.

  • If you broke it by operating group, you know, I'd say that we had steady growth across the board but I'd single out probably communications and high-tech, and resources as the biggest pipeline jump there.

  • Just to give you a little color.

  • David Togut - Analyst

  • Steve you highlighted in the previous quarter the, I guess the slight dip in demand in government because of election uncertainty, have things picked back up there in the government vertical?

  • Steve Rohleder - COO

  • I think it's been steady.

  • We've seen the opportunities come back.

  • We actually had a good bookings quarter, in government, so it actually came back pretty strong toward the latter part and I think we're still on track to hit the plan there.

  • David Togut - Analyst

  • And just finally you've highlighted the fall as a critical period for retention since some employees go back to school.

  • What have you seen with respect to, you know, the movement back to graduate school and so forth?

  • Steve Rohleder - COO

  • The good news is we've seen the attrition stuff stabilize across the board.

  • I think it's important to point out that in the U.S. and U.K. we've actually seen somewhere between 2 to 3% drop in the attrition statistic in our consulting work force and that's really where some of the school attrition happens so I think we're past most of that to be honest with you.

  • We hit a spike in September, it's now stabilized, and, you know, quite frankly we're still targeting, as I said, the high teens to kind of get by the end of the year.

  • David Togut - Analyst

  • If things stabilized offshore would you highlight it as an area of I guess weakness in the August quarter?

  • Steve Rohleder - COO

  • Yeah, they have.

  • We've again seen some steading in our outsourcing business, in the global delivery network specifically in India and Manila where attrition has stabilized.

  • We've seen a slight uptick, however, in Europe, and we've got to focus on that and try to figure out what has happened there and make sure that we've got some actions in place but to answer your question directly around the global delivery network we have seen some stabilization.

  • David Togut - Analyst

  • Thank you very much.

  • Steve Rohleder - COO

  • You bet.

  • Operator

  • Next question is from the line of Dris Upitis from Credit Suisse First Boston.

  • Please go ahead.

  • Dris Upitis - Analyst

  • You mentioned in the prepared remarks about successfully defending the systems integration business.

  • Can you just discuss the competitive environment in SI and who poses the biggest threat to you right now?

  • Bill Green - CEO

  • It's hard to come up with a composite given all the countries around the world and all the industries we serve.

  • You know, important to us, there's a lot of work at the commodity end of the S I business.

  • Important to us is making sure we defend the part that -- where we add tremendous value, the part that is essential for us delivering, you know, new and improved business outcomes, and as a result, you know, for that area of the business we really take a defensive posture about the kind of things that we need to get the kind of margins we want to make and the places where we don't want our competitors to make progress.

  • Certainly if you stand back and if you stand back from it there's a lot of competition for the commodity SI work which comes from from both companies that are traditional onshore competitors as well as the new generation offshore competitors.

  • We have a lot of respect for them.

  • It's a tough place to fight it out in the marketplace, and as a result, you know, the important element of our strategy is -- as much as the defend, is the extend, because that's taking our business to a place where the other guys can't or choose not to go, and so we try to keep balance on both those dimensions of the competitive environment.

  • Dris Upitis - Analyst

  • Okay.

  • Then can you just talk a little bit about the duration of consulting bookings?

  • I think at the analyst meeting you said that that had shortened a little bit, that the typical booking was being recognized as revenue more quickly.

  • Has that trend continued or held constant?

  • Mike McGrath - CFO

  • We've taken a look at our book to bill for both consulting and outsourcing.

  • If you just go back, say the last 8 quarters, what you would observe is that for consulting the book to bill was running roughly around 1.05 to 1.1.

  • Look at the same number for outsourcing you'd see that number was in excess of 2.

  • What we have seen in this current regime is that the consulting four-quarter average is still around 1.1 the outsourcing has come down below 2 and we expect it to settle in there.

  • Couple that with our guidance, if you will, sort of in here and in our guidance is an overall book to bill somewhere in the 1.2 to 1.35 range, is memory, and if you think about it, businesses got two thirds presently constructed two-thirds consulting, one-third outsourcing, and book to bill and consulting of 1.1 and one that's in the outsourcing space is sort of 1.5 to maybe 1.75, even to 2.

  • What you get is a composite that falls back down in that range.

  • So what we're seeing is on the consulting side the book to bill being slightly, you know, in the 1.1 range which is sufficient to feed us.

  • We'd like to have it up a bit, but that will feed us, and the outsourcing as long as we can get the composite to be sort of 1.2 or 1.25 or better we think we are enhancing as opposed to eating into our backlog.

  • Dris Upitis - Analyst

  • Okay.

  • Then last question.

  • Can you just talk a little bit about what drove the higher client financing and also the billing delays, if you can just elaborate on both of those this quarter?

  • Mike McGrath - CFO

  • Yeah, the client financing, from time to take we take deals where we're carrying some financing is a part of the deal and there were a couple that we booked last year, these things go through up and down cycles in terms of when the peak occurs.

  • There are a few that the peak happens to be occurring now.

  • Basically it's the fruition of some of the deals we booked last year.

  • In terms of what I characterize as delay in billing that actually equates to something in the range of 1 day of DSO, or $50 million, and that basically has to do with two things, I think.

  • One is the -- there's an effective amortization of prepayment that flows through there as well but beyond that that there are some number of jobs for us which are milestone based that allow us to bill when the milestone has been achieved, and that's a piece of it and we've looked very hard.

  • As you may recall we converted our financial systems to SAP in this particular quarter.

  • I might add across 50 countries, 200 legal entities, 250 interfaces, 100,000 employees, did it relatively seamlessly.

  • Wasn't a lot of very hard work for our clients.

  • And we think that some of the human capital time spent on ensuring the opening balances of our pronouncement system probably took some focus off billing and that will get fixed in the next quarter.

  • I might add as I said in my prepared remarks that we have scrubbed our inventory and receivables costly as a piece of this overall conversion and we believe it's all collectable.

  • Dris Upitis - Analyst

  • Thanks.

  • Operator

  • We have a question from the line of Andrew Steinerman from Bear Stearns.

  • Please go ahead.

  • Andrew Steinerman - Analyst

  • Hi, it's Andrew Steinerman.

  • One quick clarification on consulting bookings which is down sequentially and year-over-year but it seems like we're still very positive on the activity level.

  • Is that because we're basically looking at the last four quarters together or is there something else that we should be looking at to understand your enthusiasm for the consulting demand here?

  • Bill Green - CEO

  • Andrew, a lot of it is based on sort of the enthusiasm comes from, one, is the nature of the work.

  • Two is the level of activity in the marketplace this was a business that some people had given up for dead.

  • Andrew Steinerman - Analyst

  • Right.

  • Bill Green - CEO

  • And importantly it's come back strong and n then, frankly if you look at our pipeline, the pipeline has a lot of, you know, sort of, I guess I would use the word traditional consulting assignments where there are places where our competitive situation is very strong and a place where we differentiate and the place where we can attract sole source work.

  • I'm kind of excited about the momentum we see in there.

  • I would like to have seen bookings been a little higher in consulting but I'm relaxed about it because of what we see in the pipeline.

  • Andrew Steinerman - Analyst

  • Right.

  • And the revenue growth number, the 8% local currency that was very noteworthy.

  • Do you think we could stay in that area with what we've booked or do we need to book more to stay in that area?

  • Bill Green - CEO

  • Well, if you take a little about what some of Mike said I think we can stay in that area.

  • We're very determined to book more and just take advantage of the opportunities that are out there and that's what we're going to try to do.

  • It's sort of a business that we know like the back of our hand.

  • It's one that we truly differentiate.

  • The other point that I made earlier is, if you look at our business today, our business today started with small consulting assignments for the world's leading companies and now those are long-term contractual relationships that we have had for a long, long time, and that's another element of consulting that's exciting to us.

  • Andrew Steinerman - Analyst

  • Thanks so much, Bill.

  • Mike McGrath - CFO

  • Let me make a comment.

  • I've been told that in the dialogue that Greg Gould and I had around share repurchases there may have been some confusion in what was asked and what was said.

  • Just to be clear, in our guidance for fiscal year '05 earnings we are assuming 2 cents of earnings due to the share repurchase program.

  • Carol Meyer - Managing Partner, IR

  • Operator, I think we're ready for the next question please.

  • Operator

  • Thank you.

  • It's from the line of Moshe Katri from SG Cowen.

  • Please go ahead.

  • Moshe Katri - Analyst

  • You mentioned that attrition is stabilized at about 20%.

  • I think last quarter you broke down attrition in India versus maybe the other part of the business and I think that brought it down.

  • Is there a way to do the same thing, Steve, again today?

  • Steve Rohleder - COO

  • Hi, Moshe.

  • I'm not sure we broke it out that way.

  • We said that the attrition in India was obviously buoying that up toward 20%.

  • We also said it was consistent with the attrition that all of our Indian competitors were feeling in that region and that still holds, frankly.

  • As I said, we have made progress.

  • I'm really happy to see that we have stabilized and our target is still the high teens across the board in all of our work forces and all of our geographies, and quite frankly the comment I had earlier about early returns in October and November in the U.S. and U.K. gives us confidence that we're going to be able to get there.

  • Moshe Katri - Analyst

  • Should we assume going forward -- so we should assume that turnover rate at least I'm assuming here in the U.S. those are going to come down gradually going forward?

  • Steve Rohleder - COO

  • I think it will be a gradual decline.

  • I don't think you're going to see any big jumps one way or the other.

  • I would also point out, you know, that, you know, given where we're at with attrition, given our modeling on people we're still projecting a net increase in head count, we're not having trouble recruiting personnel, getting them in and training them, et cetera, so resourcing from the market is not an issue at all.

  • Moshe Katri - Analyst

  • Just one more question to Mike.

  • Mike, there was a $14.5 million gain on investment on the income statement.

  • Can you elaborate on that?

  • Mike McGrath - CFO

  • Yeah.

  • That represents some yield from a carried interest we still have.

  • You may recall that several years ago we sold our investment portfolio, the thing we referred to as the AC Ventures at the time, Accenture Ventures.

  • We retained a small carried interest in that, if, in fact, the portfolio that was sold outperformed certain rates, and this reflects a small return based on that.

  • So actually if you take that return and net out the reorganization benefit, you get down to sort of what I would categorize as sort of extraordinary items of around 7 million for the quarter, which is about .5 cent in terms of earnings.

  • Moshe Katri - Analyst

  • Great, thanks.

  • Carol Meyer - Managing Partner, IR

  • Next question, please, operator.

  • Operator

  • It is from the line of George Price.

  • Please go ahead.

  • George Price - Analyst

  • Hi, thanks very much.

  • I wonder, just I wanted to talk a little bit about the Americas and kind of the softer growth scene there.

  • If you could maybe elaborate a little more about what's driving that.

  • I guess you talked a little bit about, you know, kind of the staffing, some of the staffing issues and trying to focus on aligning people and opportunities, but I guess in terms of demand trends, you know, what's going on in North America are things like maybe Sarbanes-Oxley or other factors still weighing -- are they starting to maybe weigh less as you look into calendar '05 versus the end of '04?

  • Anything else out there that clients are talking about?

  • Bill Green - CEO

  • We're not seeing any impact, George, from any of the things you've mentioned there.

  • I would tell you that our pipeline is steady in America.

  • What we're focusing on, quite frankly, is converting the pipeline to sales.

  • And really setting some aggressive targets that the entire area all of our 5 operating groups can work toward, and I think in the past one of the challenges has been that we operated as somewhat 5 different businesses, and we're pulling that group together in the U.S. with a very keen focus on penetrating about half a a dozen as I said, key geographies.

  • We believe there's a significant amount of head room.

  • We've got about 2.9% market share in the U.S. and there's a lot of head room there for us to grow.

  • We've got to focus our sales efforts, and get our guys pulling in the same direction there to achieve that.

  • George Price - Analyst

  • Okay.

  • And in terms of Europe, can you give us maybe a little bit more?

  • You mentioned that you're seeing double-digit growth in Germany.

  • And obviously the U.K. doing quite well.

  • How are other areas in Europe doing?

  • What are the prospects there, you think going into '05 and what's driving that?

  • Bill Green - CEO

  • I'd characterize the Netherlands, France, and Italy as steady.

  • You know, at the beginning of the fiscal year we started this geographic focus on Germany, Japan, and the U.S., and it's the first time, quite frankly that we've really seen some good substantive growth out of Germany.

  • I think the group there is focused on driving specific market growth across all of our operating groups.

  • The U.K. continues to go gangbusters for us, to be honest with you.

  • We've got a very strong group of partners there that are focused on very large opportunities and, you know, we're continuing to see demand in that area.

  • George Price - Analyst

  • Okay.

  • And any sense of potential slowing in the U.K.?

  • Bill Green - CEO

  • Not yet.

  • George Price - Analyst

  • Okay.

  • And last question, on the -- for Mike, what's the balance of the balance sheet accounts for the reorganization liability?

  • Mike McGrath - CFO

  • It's order of magnitude $500 million, from memory.

  • Carol Meyer - Managing Partner, IR

  • We can check that for you, George.

  • George Price - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Carol Meyer - Managing Partner, IR

  • Next, please, operator.

  • Operator

  • And that is from the line of Lou Miscioscia from Lehman Brothers.

  • Lou Miscioscia - Analyst

  • Okay.

  • Great.

  • I guess the first question, I just want to make sure I understand completely the EPS that you are suggesting in the sense that you just now gave guidance for the quarter of 33 to 35 cents but in general should we take them 3 cents off to really get to an operational number so it's really 30 cents to 32?

  • Mike McGrath - CFO

  • I think that would be a fair comparison, yes.

  • Lou Miscioscia - Analyst

  • Okay.

  • Then the second question, I guess, for the full year, if we take out, then, the two things that you suggested, the 4 and the 2 then, really it looks like you increased the number by about a penny on the low end and the high end to go from $1.34 and $1.39 to $1.35 and $1.40?

  • Mike McGrath - CFO

  • That is true although I would say that I think personally the share repurchase impact is a recurring expense and needs to be factored in to the ongoing EPS considerations.

  • Lou Miscioscia - Analyst

  • Great.

  • Next question you had, I think you said that you were going to try to get DSOs down 6 days in a quarter.

  • Would you say that that's aggressive or do you think that that's actually achievable, if I heard it correctly?

  • Mike McGrath - CFO

  • By comparison last year I believe we went down from 49 to 40 between quarters.

  • I don't think we're going to get quite that low this year but a change of that magnitude is certainly doable, and between Steve and myself we have a full-court press on addressing this issue.

  • And so I think it is achievable.

  • Steve Rohleder - COO

  • Yeah, I mean, in our early review of this, we've identified a number of key contracts that have payments due in this quarter, I think that will contribute to that reduction as well.

  • Lou Miscioscia - Analyst

  • Okay, great.

  • My final question is just on the pipeline as you look forward compared to your bookings expectation, any kind of comments if we think that we should see sort of a linear kind of year?

  • Obviously when we look back to fiscal '04, you know, you had 5 billion and 7.6, then 3.4, then 4.

  • Would we expect similar choppiness this year or do you think we're going to get something a little bit nicer?

  • Steve Rohleder - COO

  • My sense is it will be a little more linear just there aren't those 2 or $3 billion nuggets in there, right?

  • As a result there's a lot more velocity, and -- over time, you know, those things sort of come due, and I think we'll see a more linear trajectory going up than we had last year, if you remember last year, you know, this quarter, we had some giant bookings.

  • Which sort of dramatically changed the outlook.

  • That said, there are certain industries out there, utilities would be one, where there are a lot of very large transformational opportunities that aren't yet in the pipeline but we expect to get them in the pipeline, and when we do, there are opportunities that are in the billion plus sort of range, and if we can get those converting, then we would be back to some of our traditional lumpiness.

  • Lou Miscioscia - Analyst

  • And U.S. visits is not in the bookings numbers?

  • Steve Rohleder - COO

  • No.

  • Lou Miscioscia - Analyst

  • Okay, thank you.

  • Carol Meyer - Managing Partner, IR

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

  • Operator

  • Thank you.

  • That will be from Pat Burton from Smith Barney.

  • Please go ahead.

  • Pat Burton - Analyst

  • Thanks for letting me on.

  • The question would be, could we get a contract update, please, on both U.S. visit and in the United Kingdom the NHS contract?

  • Thanks.

  • Bill Green - CEO

  • First of all on U.S. visit I know we signed about half a dozen task quarters to date and we're in the process of actually staffing for those. 7, to be exact, and just let me give you a sense of the scope of those.

  • One is around strategic planning.

  • We obviously put the program management office in place.

  • That was another task order.

  • We've signed a task order for data integrity for our program-level systems engineering, for the exit program pilot evaluation which is key to the overall program.

  • And then also for the I-dent system where we have actually transferred from another contractor the responsibility of the work that was done for -- over to the responsibility of the U.S. visit contract.

  • On NHS our work for NHS obviously is to help them modernize their IT systems, and just to give everybody a sense of the scope of this we're supporting about 430,000 health service staff and about one-third of the citizens just in two regions, in the northeast and eastern England.

  • Basically we've run the pilot, it seems to be going well, I would tell you that there are challenges to a certain extent with the spine.

  • We're in the process of discussing those with the client but as far as our development and responsibility I can report that progress is very good on the responsibility that we have relative to NHS.

  • Pat Burton - Analyst

  • Were either of those the contracts that led to the delayed billings?

  • And that will be my last question.

  • Thanks.

  • Bill Green - CEO

  • I'm not going to comment on individual billings around the contracts, guys.

  • We don't disclose individual arrangements on those, so I'll just stick to that.

  • Pat Burton - Analyst

  • Thank you.

  • Bill Green - CEO

  • Well, thank you for -- everyone, for tuning in.

  • In closing, let me say that we're off to a good start this fiscal year.

  • We have a few areas that need improvement but nothing is fundamentally changed in our business or our business model.

  • On balance I am pleased with where our business is now and with our outlook.

  • We're seeing a lot of momentum in the marketplace, and we believe we are well positioned to continue to differentiate ourselves from our competition and serve our clients in more innovative ways than we have ever before.

  • I believe we have the right processes and people to address the operational items we covered here today, and we're confident that we will achieve our financial objectives for fiscal year 2005.

  • And here's why.

  • We have the best people in the business.

  • And we continue to intensify our focus on attracting and retaining them.

  • Secondly, we have the best propositions in the marketplace.

  • We continue to extend our reach on offering innovative solutions to help our clients become high performance businesses.

  • And lastly, we are blessed by having the best clients in the world.

  • These are companies and governments that come to Accenture for the kind of expertise that they can't find anywhere else.

  • When you combine those 3 factors with the momentum we're seeing in the marketplace, we think it creates a pretty powerful formula for growth.

  • And we are encouraged and excited about what lies ahead and the rest of the second quarter and for our fiscal year.

  • Thanks again for joining us today.

  • Carol Meyer - Managing Partner, IR

  • Thank you, operator.

  • Operator

  • You're welcome.

  • And ladies and gentlemen this conference is available for replay after 9:45 p.m.

  • Eastern time today, January 6, through January 20, at midnight.

  • You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and enter the access code of 762547.

  • International participants may dial 320-365-3844.

  • Those numbers again are, 1-800-475-6701, and 320-365-3844 with the access code of 762547.

  • That does conclude your conference for today, thank you for your participation and for using AT&T Executive TeleConference.

  • You may now disconnect.