埃森哲 (ACN) 2005 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to Accenture's Q2 fiscal year 2005 earnings call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Carol Meyer Managing Partner of Investor Relations.

  • Please go ahead.

  • - Managing Partner of IR

  • Thank you operator and thanks everyone for joining us for today for Accenture's second 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 Chief Operating Officer.

  • And I hope by now 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 take you through the results in more detail and Steve will add some operational perspective.

  • Then Mike will discuss our business outlook for the third quarter and the full fiscal year '05 and then we will open the call up for questions.

  • As a reminder, when we discuss revenues during today's call we are talking about revenues before reimbursements or net revenues, and some of the matters we will discuss on this call are forward looking and I would like to advise you that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

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

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

  • During our call today our speakers may reference certain nonGAAP financial measures which we believe provide useful information for investors.

  • We will provide reconciliations of those measures to GAAP and you can find those reconciliations on the Investors Relations page of our website at accenture.com.

  • So now let me turn it over to Bill.

  • - CEO, Director

  • Thank you, Carol and good afternoon to everyone.

  • We're pleased to be here with you today, and could not be more pleased with our strong top and bottom line performance in the second quarter of the fiscal year.

  • Net revenues of 3.81 billion, a quarterly report for Accenture.

  • Double digit increase year-over-year in U.S. dollars and local currency.

  • We're also pleased with the diluted earnings per share of $0.35 for the second quarter.

  • This represents a 59% year-over-year increase on a GAAP basis.

  • And it is at the high end of our expected range of $0.33 to $0.35.

  • We achieved U.S. dollar and local currency revenue growth across all five of our operating groups and all three of our geographic regions.

  • We are particularly pleased with the growth of products and financial services.

  • Financial services recorded revenue growth of 33% in U.S. dollars, and 25% in local currency for the quarter.

  • We continue to be encouraged with the momentum we see in our consulting business.

  • Our consulting revenues reached 2.3 billion for the second quarter, or 60% of our total net revenues.

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

  • We also had record revenues in outsourcing of 1.51 billion or 40% of total net revenues for the second quarter, a year-over-year increase of 18% in U.S. dollars, 13% in local currency.

  • We made great progress on the operational challenges we discussed last quarter.

  • We reduced our days services outstanding or DSOs to 46 in the second quarter from 55 in the first quarter.

  • We achieved free cash flow of 726 million in the second quarter, compared with a negative 116 million in the first quarter of this fiscal year.

  • We also drove our attrition rate down below 18% in the second quarter, from 20% in the first quarter of this fiscal year, and in line with our target range for attrition.

  • We continue to have opportunity to improve margin performance; although, I am pleased with the way our people have aggressively attacked and addressed the issues of last quarter, how we tackled these challenges, is reflective of how we tackle any challenge and how we run this business.

  • Mike will discuss these in more detail.

  • I would like to take a few minutes and comment on our pipeline and new bookings.

  • Our pipeline remains strong, for the second quarter the pipeline was up year-over-year in both consulting and outsourcing.

  • We continue to see improvements in the win rate for our work.

  • It is worth noting that we are seeing the dramatic benefits from the program we put in place about a year ago to put more rigor into our pipeline management process.

  • New bookings for the quarter were 4.88 billion, with particular strength in consulting new bookings.

  • Consulting new bookings were 2.81 billion for the quarter, up 43% from the first quarter of fiscal year 2005.

  • Outsourcing new bookings were 2.07 billion for the second quarter, flat over the first quarter of fiscal year 2005.

  • To give you some perspective, we are seeing a broad range of new bookings.

  • In the second quarter we had one win in excess of $500 million, two wins between 200 million and 500 million, and four wins between 100 million and 200 million.

  • Let me also say a few words about our recruiting success.

  • As you know, we are in an increasingly competitive environment for talent.

  • But we continued to attract the best and brightest people to Accenture.

  • Our head count was approximately 110,000 at the end of the second quarter, up 7% from the end of fiscal year 2004.

  • This includes growth in each of our major markets, including the United States and the UK.

  • We remain on track to achieve our net head count growth target.

  • I also want to note our recruiting success in India.

  • We now have approximately 12,000 people in India, where we continue to grow in that market.

  • India plays an important role in our global delivery network.

  • Steve is going to walk us through some success of our global delivery model.

  • I feel good about the business, the activity level continues to be high, and, in fact, is higher than it has been in years.

  • We are winning in the market as many of our competitors struggle or are distracted.

  • Our earnings are solid and most important we have our hands on the levers to improve quality and performance in this business.

  • I'm going to turn the call over to Mike now, but I will come back later to talk about some things we are doing to differentiate ourselves in the marketplace, and to innovate for our clients.

  • - CFO

  • Thanks, Bill and good afternoon.

  • The best way to begin the discussion is to recognize that the second quarter overall is one in which we had very strong top line growth and EPS at the high end of the range.

  • We were also able to make significant improvements in some operational challenges we discussed in the first quarter.

  • At the same time, our operating margins are still under pressure, we will continue to focus on the causes and the actions needed for improvement.

  • Let me walk you through our income statement, balance sheet and cash flow in more detail.

  • Net revenues were 3.81 billion for the second quarter compared to 3.3 billion for the second quarter last year this represents an increase of 15% in U.S. dollars and 10% in local currency.

  • And is the head of our expected range of 3.6 to $3.75 billion.

  • Gross margin for the second quarter of 2005 was 30.8%, compared with 33% for the second quarter of last year.

  • I'm going to cover the reasons for this decline when I discuss operating income and operating margins.

  • I'm particularly pleased that for the second quarter our SG&A cost of $738 million were 19.4% of net revenues, compared with 675 million or 20.4% of net revenues last year.

  • This is consistent with our goal of reducing SG&A cost to approximately 20% of net revenues for the year.

  • If you are following along on the income statement, let me remind you of the line item on our income statement titled "Reorganization benefits and restructuring costs."

  • Reorganizational liabilities 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 that affect our operating income, income before minority interest, and EPS.

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

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

  • Restructuring costs result from a global real estate consolidation that we undertook to improve our cost structure.

  • During the second quarter of last fiscal year we had a $107 million restructuring charge.

  • In the second quarter of this fiscal year we recorded a net reorganization benefit of $36 million, which included a $42 million reduction of reorganizational liabilities, offset by $6 million interest expense.

  • With this as background, let's look at operating income.

  • Operating income for the second quarter of fiscal 2005 was $472 million, or 12.4% of net revenues.

  • Compared with $307 million at 9.3% of net revenues for the second quarter last year.

  • Excluding the previously described reorganization and restructuring items, operating income for the second quarter of fiscal 2005 was $436 million or 11.4% of net revenue compared with $415 million or 12.6% of net revenue for the second quarter of last year.

  • Our objective is to deliver operating margins in the 13% plus range.

  • Three factors negatively affected our progress in the second quarter.

  • One-third of the shortfall is linked to our work for NHS the National Health Service in England to design, develop, and deploy new patient, administration, assessment, and care systems.

  • We have experienced temporary delays in our ability to deploy as planned a number of the systems components.

  • The delays in the deployment resulted in lower than expected revenues, margins, billings, and cash flows to date.

  • We are also continuing to carry unbilled services for the NHS contracts in amounts significantly above our initial estimates.

  • In the second quarter, we recorded the loss of approximately $24 million on these contracts.

  • Bringing the total loss for the first six months of fiscal year 2005 to approximately $38 million.

  • We are carrying $349 million in client financing and other assets attributable to this client on our balance sheet.

  • We are working with the NHS to agree on alternative deployment plans and to consider different financing arrangements.

  • Under our contracts with the NHS, our ability to bill and collect the unbilled services we are carrying is subject to our ability to agree with our client on alternate deployment schedules and to successful deployment.

  • Based on agreeing to the alternative deployment plans currently under discussion we expect aggregate losses on the NHS contracts for this fiscal year could be from 110 to $150 million and client financing and other assets attributed to this client could total 400 or $460 million by the end of the fiscal year.

  • Based on agreeing to these deployment plans we currently expect contract losses to continue in fiscal 2006, but at levels less than those expected for this fiscal year.

  • I want to emphasize that we are taking appropriate actions, including placing the senior leadership partner on the engagement, cost management and discussing the alternative deployment schedules.

  • As we accelerate deployment we expect these contracts to turn the corner in fiscal year 2007 and to achieve expected profitability over the remainder of their terms.

  • The second factor accounts for almost half of the shortfall in operating margin.

  • As you know we often invest in reusable assets in connection with client engagements.

  • We had a few cases in the second quarter where we incurred cost overruns in building these assets.

  • We have expensed these overruns and accrued for future cost were required by GAAP.

  • In all of these situations the assets we are building now will become part of our offerings used at multiple clients.

  • Just to reiterate, do not expect these contracts to materially affect future operating results.

  • The remainder of the shortfall is linked to delivery inefficiencies, including the staffing issues that we discussed last quarter.

  • We are making progress on the underlying causes.

  • For example we have set targets for some contract usage across all of our operating groups.

  • We did not accrue variable compensation in the second quarter which partially offset these margin challenges.

  • We now expect to accrue up to $100 million in variable compensation for the full fiscal year.

  • Notwithstanding the issues I have just discussed, on the positive side of operating margin we continue to see pricing firm up, the majority of our client engagement portfolio in both consulting and outsourcing continues to operate at or above target and our SG&A costs were 19.4% of net revenues for the quarter compared with 20.4% in the prior year.

  • We continue to target operating margin of 13% or better for the full fiscal year.

  • Our effective tax rate for the quarter was 30.6%.

  • This includes the effect of the reduction in the year-to-date tax rate from 34% to 32.3%, as a result of the changes in the Company's forecasted mix of geographic income and the reduction of reorganizational liabilities.

  • Diluted earnings per share for the second quarter were $0.35 compared with $0.22 for the second quarter last year.

  • As previously discussed our second quarter EPS included a benefit of $0.03 per share related to the reduction and reorganizational liabilities that I mentioned earlier.

  • EPS for the second quarter of fiscal year 2004, included a $0.07 restructuring charge.

  • Our balance sheet remains strong.

  • At February 28, our total cash balance was $3.06 billion.

  • Cash combined with 702 million of fixed income securities, classified as investments on our balance sheet was 3.76 billion.

  • We are pleased that client balances which are comprised of current and non current unbilled services, receivables from clients and deferred revenues decreased $350 million from November 30, to $2.24 billion at the end of the second quarter.

  • We made significant improvements in our days services outstanding or DSOs.

  • DSOs in the second quarter were 46 days down from 55 in the first quarter and in line with our objective of 49 days or better by the end of the second quarter, that we discussed in our last quarterly call.

  • In the second quarter of this year, free cash flow defined as operating cash flow net of property and equipment additions was $726 million this was comprised of operating cash flow of $787 million, less property equipment additions of 61 million.

  • On a six-month fiscal year-to-date basis, free cash flow was $610 million, operating cash flow was $726 million, and property and equipment additions were $116 million.

  • As we have said in the past, maintaining strong cash flow and a strong balance sheet continues to be key financial objectives.

  • Total debt at February 20, was $82 million.

  • This $82 million is comprised of a normal level of debt associated with certain geographic operations, and a reclassification of $35 million previously included in other liabilities for amounts payable related to our acquisition of Accenture HR Services in February of 2002.

  • Additionally our credit ratios and returns remain strong.

  • Return on invested capital of 48% in the second quarter ranks Accenture second against the S&P 100 companies.

  • Return on equity and return on assets at 51% and 16% respectively rank Accenture 6th and 9th against the S&P 100.

  • Our second quarter net revenue growth of 15% in U.S. dollars ranks Accenture 26th against the S&P 100.

  • Before I turn it over to Steve, I will comment on our share repurchase activities in the quarter.

  • Let me remind you of two things.

  • First, there have not been any changes in the terms of the transfer restrictions on the shares held by our partners.

  • Second, as we have said, we do not expect to conduct any more large marketed secondary offerings.

  • As you recall in October we announced an additional share repurchasing authorization.

  • During the second quarter of fiscal year 2005 we repurchased 4.7 million Accenture limited Class A common shares with a value of $121 million.

  • We also purchased 3.5 million, Accenture SCA Class 1 common shares from partners and former employees for $86 million.

  • As of February 28, we had approximately $3 billion of total repurchase authorization remaining.

  • Of that amount, 913 million is earmarked open to market purchases and the remainder for purchases from our partners and former partners.

  • I should also add that on March 7, 2005 we closed a tender offer initiated during the second quarter and purchased approximately 19 million more SCA Class 1 common shares from partners and former partners with a total value of $501 million.

  • For the balance of fiscal year 2005, we expect to continue open market purchases and our share management plan transactions.

  • In addition, to the $501 million discussed above, I expect to purchase between 600 million and $1.1 billion worth of our shares during the rest of the fiscal year.

  • We expect these repurchases to occur roughly pro rata over the two remaining quarters of this fiscal year.

  • I want to bring to our attention one other item related to our strategic financial architecture.

  • As you know we continue to study the possibility of paying a dividend to our shareholders.

  • But our Board of Directors has made no decision regarding a future dividend declaration.

  • They have authorized us to take steps to be in a positions to pay dividends.

  • This requires some housekeeping changes at the Accenture SCA level to facilitate the efficient payment of a dividend.

  • We are working on these changes now and expect to have more information in the coming weeks when our Accenture SCA subsidiary makes the necessary preliminary filings with the SEC.

  • Before I provide you with our business outlook for the second quarter and the full fiscal year I want to turn you over to Steve Rohleder for some more operational detail.

  • - COO

  • Thanks, Mike and good afternoon, everyone.

  • I will comment briefly on the performance of our operating groups and geographic regions then I want to take you through some of the key components of my operational agenda.

  • Let me start with a brief look at our operating group performance.

  • The details are outlined in the news release but I wanted to call attention to financial services which recorded net revenue growth of 33% in U.S. dollars and 25% in local currency, for the quarter.

  • And to products which recorded net revenue growth of 19% in U.S. dollars and 14% in local currency.

  • Next let's look at our geographic regions.

  • In Europe, Middle East and Africa or EMEA our net revenue growth was 27%, in U.S. dollars and 17% in local currency.

  • This was driven by strong growth in the UK which grew 22% in local currency and Spain, which grew 21% in local currency.

  • Germany and Italy also recorded strong double digit growth in U.S. dollars.

  • In the Americas, net revenues increased 3% in U.S. dollars and 2% in local currency.

  • I'm going to talk in a minute about our Grow America program which is one of my top operational agenda items.

  • In Asia Pacific net revenues grew 22% in U.S. dollars and 15% in local currency, driven primarily by Australia and Japan.

  • There are four areas I want to cover in my operational agenda.

  • First is our Grow America program, second is people management, third is our quality assurance program, and fourth is our global delivery network.

  • Last quarter we introduced a new Grow America program to accelerate growth in the U.S.

  • We have taken a number of key actions since then.

  • To increase our opportunity pipeline, we renewed our focus on key markets.

  • To improve resource deployment, we have introduced new technology to better match people to open roles and finally, to meet increased demand we built up our recruiting capacity by 25%.

  • We now have about 27,000 people in the U.S. market and we're recruiting over 7,000 more this fiscal year.

  • Now let's turn to people management.

  • Our utilization for the second quarter remained at 85%, consistent with the first quarter.

  • Our attrition dropped below 18% for the second quarter from 20% in the first quarter.

  • The main contributors to this decline in attrition were the U.S., the UK, India, and China.

  • We also saw a significant reduction in the attrition rate in our consulting work force, particularly in the U.S.

  • Our head count at the end of the second quarter was approximately 110,000, and we expect to end the fiscal year with about 120,000 people.

  • Now, let's look at quality assurance.

  • You heard Mike talk about operating margin and some of the execution issues we are tackling.

  • We continue to extend our quality assurance program given the increasing complexity of our work.

  • For example, we introduced a certification process in the second quarter and trained more than 300 of our most senior partners.

  • Finally let me turn to our global delivery network.

  • Industry analysts have recognized us for building the first truly global delivery capability in the industry.

  • It now consists of more than 40 delivery centers on five continents.

  • Our global delivery network allows us to bring together the right mix of people, skills and capabilities to provide hundreds of our clients with even more price competitive and cost effective solutions.

  • Three clear benefits are that we provide solutions and services consistently high quality, reduced risk, and speed to market.

  • I spent several days in India last month visiting our delivery centers in Bangalore and Mumbai.

  • Over the past year we've more than doubled our workforce in India to more than 12,000 people.

  • We now serve approximately 150 clients through our operations in Mumbai Hyberabad, Genai, Hyderabad, and Bangalore.

  • We've also earned recognition for the quality of our operations.

  • Our customer contact center in Bangalore was awarded the world's first Gold Standard certification by the customer, operations performance center, a leading customer contact authority.

  • When you look at initiatives like our global delivery network and quality assurance program you get a sense of our ability to scale and provide exceptional service to our clients.

  • Let me close by saying, that my operational agenda is critical to our strategy for profitable growth.

  • I am confident that our focus on these areas will help us deliver our financial objectives.

  • Now, I will turn the call back to Mike.

  • - CFO

  • Thanks, Steve.

  • Before I talk about our business outlook, let me recap the second quarter.

  • We have made it clear that we have some issues related to our operating margin.

  • We believe that we have identified the causes, articulated the actions we are taking and laid out the financial impact.

  • That said, we see a lot of positives.

  • We are pleased with our double digit top line and bottom line performance for the second quarter.

  • We had strong growth in both consulting and outsourcing revenues, and we are especially encouraged by the level of our consulting new bookings.

  • Marketplace activity is strong and our basic book to business is healthy.

  • We continue to see pricing improvements.

  • We continue to drive down our SG&A cost percentage.

  • Our attrition rate is down.

  • I think it's also important to note that while our operating margin percentage declined operating income was up year-over-year by $165 million.

  • Our balance sheet remains strong.

  • We made improvements in our client balances achieving a significant decrease in our DSOs and had strong cash flow for the quarter.

  • Turning now to our business outlook.

  • For the third quarter of fiscal year 2005, we expect net revenues to be in the range of 4 to $4.2 billion, and diluted earnings per share to be in the range of $0.48 to $0.50 .

  • GAAP diluted earnings per share for the third quarter of fiscal year 2005 will include a benefit $0.06 per share from the $69 million reduction in reorganizational liabilities.

  • This reduction is recognized in March 2005.

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

  • We have updated our outlook for diluted earnings per share and we now expect EPS to be in the range of $1.49 to $1.53.

  • For the full fiscal year, reductions in the reorganizational liabilities are expected to contribute $0.11 per share, to the diluted earnings per share amount.

  • We expect our annual effective tax rate for fiscal year 2005 to be in the range of 31% to 33%.

  • We continue to expect operating cash flow to be in the range of 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.

  • But we think it's more likely that we will be at the lower end of this range. we continue to target new bookings for the full fiscal year in the range of 18 billion to $20 billion.

  • Thank you and let me turn the call over to Carol who will open the call up for Q&*A.

  • - Managing Partner of IR

  • All right operator, I think we're ready to take our first question please.

  • Operator

  • Thank you. [OPERATOR INSTRUCTIONS] We'll go to the line of Adam Frisch with UBS.

  • Please go ahead.

  • - Analyst

  • Thanks, good afternoon.

  • On the NHS deal are the losses due to your performance or are they influenced more by the delays in British Telecom's ability to build out this fine?

  • What's changed in the past few months for you to disclose the magnitude of losses you spoke about on the call and finally why are you choosing to expense the losses when most of your peer group would take it as a pro forma charge?

  • - CFO

  • Well, let me comment on the accounting.

  • We are accounting under GAAP for how we account for our contract, which is some combination of what you do, it's consulting type work and outsourcing type of work.

  • So the accounting is not -- it's how we account for it.

  • Why we decided to disclose it now is that the numbers have reached a magnitude where we believe it is in the best interest of transparency to our investors in the market place to lay out the facts as we know them best.

  • As far as relationships with the client, we are in discussions with the client and we are really not at liberty to delve into the details of the engagement per se.

  • - Analyst

  • So you can't say if it's this fine or if it's what you are delivering to them?

  • - CFO

  • No.

  • - Analyst

  • Okay.

  • Let me ask it this way, if this contract weren't happening, or you didn't have the problems that you were having with it, would you expect variable comps to be in line with your prior commentary and flat year-over-year?

  • - CFO

  • Well, certainly this contract, as -- has impacted.

  • This has impacted our ability to pay ratable comp in the quarter.

  • So I guess the answer to that question is yes.

  • - Analyst

  • Okay.

  • Final question, your consulting bookings and growth, turning to something positive here, I think I can honestly say they blew most expectations out of the water.

  • But what do the results this quarter and the color behind them, things like, type of contracts or duration and pricing tell us about what we should be expecting in the next few quarters for consulting and the sustainability of the strength that we are seeing in this quarter.

  • - CEO, Director

  • Adam, this is Bill.

  • We would like to think that we are going to see continued momentum.

  • I think I talked about that in the past.

  • If you look at the nature of the work, they are traditional consulting assignments, of a variety of durations and size and scale.

  • But importantly, there's elements in that of transformational work, of people reinventing their business, and people seeing more confidence in the economy and reaching out to do some things that they had put off, whether it's around customer service, supply chain, financial performance, management or others.

  • So I think we feel good about the activity we see there.

  • And the momentum and we're hoping that more of the activity we see in our pipelines will ultimately convert to bookings.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question is from Gregory Gould of Goldman Sachs.

  • Go ahead, please.

  • - Analyst

  • Thanks.

  • Bill, to dive in a little bit more on the demand what do you think explains the relative strength in Accenture's consulting versus, what we are hearing from technology companies?

  • - CEO, Director

  • Well, I think you have to separate, you know, what's -- how much of the consulting is driven by technology expenditure.

  • Most of the decisions that we're seeing on the significant size, 20, 50, $100 million assignments, are business decisions not technology decisions.

  • There is a technology component to that.

  • Sometimes it involves technology being purchased.

  • Sometimes it's leveraging technology that has already been purchased.

  • So I think if you stand back and look at the task at hand, it's very traditional operational consulting, with a technology underpinning to it.

  • So, Greg, we sort of separate it from what's happening in terms of tech purchases and look more at business confidence, and CEO level confidence, and people with a will and resolve to make changes in their business because, they see an opportunity to improve their competitive position.

  • - Analyst

  • And on pricing, are you able to put through price increases with existing projects or is it just in new projects.

  • - CEO, Director

  • Well, frankly, I -- you know with the existing projects, it's harder to get a handle on.

  • The measure that I continue to look at is the pricing on new bookings.

  • We now have that heading in the right direction, which is important element to me.

  • And I guess our word across the enterprise is that, you know pricing has certainly stabilized and as we look at the new bookings we see it heading in the right direction.

  • - Analyst

  • And last question on NHS.

  • How confident can we be that the reduced outlook for this year, 110, to $150 million cost is the final number.

  • We have seen other big contracts with other companies continue to degrade.

  • Is there any way you can put a box around the down side?

  • - CFO

  • We think the range we gave you boxes the down side.

  • We have given you estimates based on the best information we have.

  • If they would change, we would let you know.

  • - CEO, Director

  • I would just add, Greg, if I might this is a terrific assignment.

  • This is a pioneering, ground breaking assignment.

  • We could not be more pleased to be on it.

  • When you take on something of this magnitude, and this challenge, you are going to have a few bumps along the way.

  • It is not that we didn't anticipate those.

  • We are working very closely with the client.

  • Our relationship with them is terrific and we feel great about our deployments, which is really how the economic deal works for this whole construct.

  • So I think as Mike said we feel we did put a box around it and more importantly, to me, is what we have the potential to get done there in terms of breaking new ground.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Your next question is from David Togut of Morgan Stanley.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • Could you -- could you address the second driver of the operating margin shortfall, the cost overruns on some of these reusable assets?

  • What are the prospects for that over the next 12 to 18 months?

  • Is this sort of a quick turn around or a longer term fix?

  • - CFO

  • Well, as I said, we think the impact has flowed through this quarter.

  • We recognize losses that we had in the quarter and we have accrued for under GAAP for the future expenses that we expect to incur on several incidents.

  • So we're comfortable that -- although we are not happy we are comfortable that what has happened is eventually bias on an operating income standpoint.

  • - Analyst

  • How much of a surprise were these cost overruns.

  • I know you have put in some incremental controls on contracts about a year, year and a half ago.

  • - CEO, Director

  • Yes, let me comment on that, Dave.

  • You know as you referred to, basically we got a review process executed by each one of our operating groups that monitors all of our high-impact projects.

  • Every project that Mike alluded to in the asset area was on that high-impact area.

  • We had visibility into the performance, and when we saw the change, we made -- we instituted what we needed to do from an operational standpoint, and we've reflected that in our results.

  • So they weren't surprises.

  • We were monitoring them and we've intentionally made the accounting adjustments that we need to make to account for that.

  • David, I just want to add on this, you know, what we did is we took a path that said get it done.

  • Get it right, because these are assets that we can leverage to multiple clients.

  • This is incredibly important to us, and so we just took a very straight forward approach to the accounting, and maybe more importantly, to getting it right and getting them done and being able to leverage them to drive revenue and profits in the marketplace.

  • So that's the decision we made about that.

  • - Analyst

  • Just finally what drove the improvement in attrition in the quarter?

  • And what factors drove the improvements geographically?

  • - COO

  • Well, I think it is a number of things.

  • First of all, as you and I have talked about, back in the fall we put in some very specific programs to focus on connecting our executives to our people.

  • I think that's helped and, you know, the continued utilization that we've got in the marketplace now, I think is another contributing factor.

  • We work on the most complex projects out there.

  • Our people want to build skills around the types of projects that we're delivering for our clients, and, it's a combination of both of those things, I think.

  • - Analyst

  • Okay.

  • Thank you very much.

  • - COO

  • You bet.

  • - CEO, Director

  • Thank you.

  • Operator

  • Your next question is from Andrew Steinerman with Bear Stearns.

  • Go ahead please.

  • - Analyst

  • Hi, it's a question for Mike.

  • Just gross margin formation, particularly in the May quarter.

  • Obviously you explained the whole facts that we have here in February.

  • Could we at least see a normal seasonal upturn on gross margins and could you just give us a sense of where gross margins might settle out in the May quarter?

  • - CFO

  • Well, the third quarter is typically our strongest quarter of the year.

  • I'm not going to give you a number on gross margins but I -- we are continuing to target operating margin of 13% for the year which would tell you we need to improve significantly in Q3 and Q4 to make that happen and we think the operating items that we took this quarter exclusive of NHS are behind us.

  • So I would expect that the mix of business has stabilized as it were in the near term to see some improvement in that.

  • - Analyst

  • Right.

  • And are there any other things that might help gross margins on the near term?

  • - CFO

  • Well, pricing has firmed.

  • That's a plus.

  • And we continue to work on our cost of services.

  • Those are the two basic components and we're working on both ends of it.

  • - Analyst

  • Thank you very much.

  • Operator

  • We will now go to the line of Rod Bourgeois with Sanford Bernstein.

  • - Analyst

  • I wanted to drill a little more -- focus a little more on the drivers of the operating margin performance that you need in the next few quarters to get back up to 13% for the year.

  • I guess the main question I would ask, can you get back to 13%, without an improvement in consulting business pricing?

  • Is that a doable goal?

  • - CFO

  • If consulting pricing remains, let's say as it is.

  • I think the answer to that question is yes.

  • I think the cost of services is where we need to improve, as I talked through in my remarks.

  • We think we know what to do and we're about doing it and have reasonable confidence that we can get it done.

  • - Analyst

  • And what are the key levers there that -- I mean beyond things that you've talked about so far?

  • - CFO

  • Well, first key lever is to not have one time blips that can take us down in terms of the, sort of the second and third type problems that I outlined and beyond that, the third quarter particularly is usually strong, from a total -- from a revenue top line growth, and that adds a little juice to the gross margins.

  • So I think that we looked at this as a doable objective.

  • - Analyst

  • Okay.

  • Great.

  • And can you specify a little bit more what the investments were where you had some cost overruns.

  • When you talk about the areas where you're investing does that include RFID or is it other areas that have been -- not been specified before.

  • - CFO

  • I'm not going to get into the specifics, other than to say that they are generally in industry verticals.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Our next question is from the line of Bryan Keane with Prudential.

  • Please go ahead.

  • - Analyst

  • Yes, good afternoon.

  • Just looking for some comments on the outsourcing market.

  • It's been, you know, in the industry it's been a little bit soft.

  • Accenture seems to be doing fine, kind of 2 billion in books in the last two quarters.

  • How does the pipeline look there on outsourcing?

  • - CEO, Director

  • Yes, this is Bill.

  • You know, the pipeline -- I think what's floating around the industries are the size of the deals has gone down and I think that's fundamentally true.

  • A lot of them are in one tower, as opposed to multi tower deals.

  • But at the end of the day, the volume and the velocity of the opportunities continues to be good.

  • Their size continues to be -- continues to be smaller than it has been.

  • So instead of the big binary bets that there has been in the past, you know there's a lot more velocity in there and frankly a lot more chance to have sort of a more balanced and consistent growth trajectory and outsourcing.

  • So we are relaxed about it.

  • You probably also noticed we brought in Kevin Campbell to help in that area of the business to work with Jo Ellen.

  • And so we're confident.

  • We feel good about the business and the pipeline continues to have plenty of activity on it.

  • I couldn't tell you what it will be like 12 months from now but for right now we're pretty comfortable with it.

  • - Analyst

  • And the Texas welfare eligibility contract that came up looks like you guys have the award on that.

  • Is that -- is that going to be in this upcoming third quarter's bookings.

  • - COO

  • We are still in negotiations with the client.

  • So we can't comment on what quarter, obviously, it would be recognized in.

  • So I have to leave it at that.

  • - Analyst

  • Okay.

  • But I guess there was a little bit of noise about a possible protest, you know, should we be concerned about that?

  • Or is it still up in the air?

  • Or do you think you have the contract?

  • - COO

  • The protest is still -- has not been resolved but the client continues to negotiate with us.

  • So --.

  • - Analyst

  • Okay.

  • And then just finally, the variable comp, the reduction there, is that a major concern about what that means to the employees or is that just the basis that you think that the compensation is good enough with what you are giving out that you don't need to pay out that same amount that you paid the prior fiscal year.

  • - CFO

  • Well, I think it's important to step back and remember that the variable comp we talked about is a relatively small component of our payroll.

  • It affects something less than 20% of our employees.

  • It's a class that -- well it's our senior leadership, it's also a class that owns the stock for the most part that's owned by Accenture.

  • So they share what the rest of the shareholders is the desire to see the stock perform.

  • And certainly compensation is an important piece of the fabric of an employees factoring here, but it's also the company they work for, the people they work with, the work they do, and a lot of things that are on the softer side.

  • You know our compensation is mark irrelevant and I think our employees understand we have a blip, this group has stepped up to take part of the pain.

  • - Analyst

  • Okay.

  • That's helpful.

  • Thanks.

  • Operator

  • Thank you.

  • We'll now go to George Price with Legg Mason.

  • Please go ahead.

  • - Analyst

  • Thanks very much.

  • First, I wanted to ask about government a little bit.

  • Obviously, the profitability in the government -- the government's statement was low.

  • I'm assuming that's entirely due to UK NHS.

  • But I wanted to ask if there was any impact with regard to visit and maybe how visit is progressing.

  • - COO

  • There wasn't any any impact from visit.

  • Although, I would also add that the three components that Mike mentioned, each impact is the government results for the quarter.

  • The pipeline in government is still strong.

  • We continue to be very bullish on the sales that we have pending and frankly, I think the business is healthy, save the items that we have run across this quarter.

  • - CEO, Director

  • Visit is going well by the way, just to comment on that.

  • We continue to push through task orders.

  • The client is very happy with our performance.

  • So there's no impact there.

  • - Analyst

  • And I -- as I understand it, there's a -- there's a significant deliverable coming in May or June.

  • Is that correct?

  • Kind of a broad implementation, vision, and strategy that may drive funding over the next couple of years?

  • - COO

  • There is.

  • It's a blueprint, and I visited with the team last week, and we're on track to deliver it.

  • - Analyst

  • Okay.

  • And one more question, just on the bookings some -- may be a little bit concern possibly about the outsourcing bookings and I wanted to explore one, if you see outsourcing deals as we move through the calendar year, do you think the activity around bookings there might pick up and then -- and then other side of that question is with the average duration trending down, is that -- you know how much of a factor is that also and what's happening with the outsourcing bookings value?

  • - CEO, Director

  • Well, I mean this is Bill.

  • I think the duration tending down certainly has an impact on the big number, if you will, with the original signing.

  • But frankly it's interesting because the outsourcing stuff if you stand back from it there's not a management team around that isn't being asked by their Board whether they've considered the opportunity to improve their business performance by leveraging outsourcing and so the activity level continues to be high and we feel good about it.

  • I think it will continue to change a little bit, as time goes on here.

  • But we feel good about it and frankly in the pipeline, we do have some -- some of those very large traditional outsourcing assignments, that frankly, one or two of those can dramatically change your bookings number for the year overnight.

  • It's just -- it's a hard way to live and as a result I'm more comfortable with a balanced amount and more velocity and activity in the pipeline with those big assignments riding on top of it, instead of being kind of the thing that we all stand back and watch to see what's going to happen.

  • - Analyst

  • Great thank you very much.

  • - Managing Partner of IR

  • All right, operator, I think we have time for one more question, please.

  • Operator

  • Thank you.

  • That will come from Moshe Katri with SG Cowen.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • I actually have two follow-on questions.

  • Based on last quarter when recruiting inefficiencies impacted the bottom line by about 3-pennys.

  • Should we assume that this quarters impact was not as significant?

  • That's number one.

  • And then two, shifting to Europe, specifically looking at the growth numbers from Europe that looked pretty impressive, maybe you can go through the various geographies or maybe countries in Europe and talk about some of the demand trends that you are seeing.

  • And then do you attribute that impressive growth in Europe to market share gains or fundamentally you are seeing demand improving.

  • Thanks.

  • - CFO

  • Let me comment on the first question.

  • Steve can comment on the second.

  • Relative to your first question, yes, the impact this quarter we believe is less than last quarter.

  • - COO

  • Okay.

  • Moshe, just to tackle the European question.

  • In the UK, let me just give you a little color around a couple of the countries.

  • First of all, in the UK, the strong growth was buoyed by FS and CHT.

  • In terms of taking market share, I'm not sure I can comment on that but the fact is we had strong growth there and we continue to have strong growth there.

  • In Spain I commented on the great results there.

  • That was also really driven by our financial services organization.

  • And then in Italy, and in Germany, it really was across the board in each one of the OGs.

  • So we continue to see a strong pipeline.

  • As you know, the UK has been on fire for the last eight quarters and we just continue to -- to be successful in that marketplace.

  • - Analyst

  • And then finally, utilization, turnover rate actually, does come down on a sequential basis as you mentioned.

  • Was there any -- any drive there, any significant source for that reduction?

  • Did it really -- was it actually across the board by geography?

  • Was it also -- you know was there a major drive coming out of India, for example?

  • - COO

  • No.

  • You are talking about appreciation?

  • - Analyst

  • Yes.

  • - COO

  • Okay.

  • No, it was primarily driven by the U.S. and the UK.

  • I mean we did see a drop in India, which was -- which was very positive.

  • We have been working hard to make sure that we've put some people programs in place to increase our retention.

  • But I was really happy with the drop in U.S. consulting attrition, because as Bill's pointed out that seems to drive a lot of our growth and is driving a lot of our growth and we have got to make sure we manage that number very closely.

  • So we are seeing some real positive signs in that.

  • - Analyst

  • Great.

  • Thanks.

  • - CEO, Director

  • This is Bill.

  • Just let me make a few remarks in closing here if I can.

  • I want to just take a couple of minutes and talk to you about some of the things we are doing to differentiate ourselves in the marketplace and to innovate for and with our clients.

  • Our success over the long term is rooted in our ability to look around the next corner and to help our clients understand the trends that will shape their businesses, and then help equip them with the tools necessary for them to succeed.

  • Innovation.

  • Innovation is at the core of being a leader in this business.

  • It is also key to differentiating Accenture in the marketplace and with our clients.

  • Being relevant to our clients is essential to stay relevant, I believe there are two things we must do.

  • First we must always have the courage to do the leading and defining work, to pioneer to prove out and to set the agenda and pace for performance improvement.

  • I think if you look at the nature of what we do today that is exactly what we are doing.

  • Second, we have to have the will and the courage to drive practical innovation.

  • And we have to do that on a continuous and a breakthrough basis.

  • As a result, our focus on innovation is essential to us, and one area that we have spent a lot of time on recently is the area of business intelligence.

  • We see a tremendous market opportunity to work with our clients so they can truly differentiate themselves by leveraging technology and smart business process to synthesize, retrieve, use and share information for dramatically improved decision making.

  • We have already teamed with many, many clients to help them leverage our business intelligence capabilities and we'll be communicating more about the work we're doing with our clients in this area, as well as the offering we intend to take to the market in the next few months.

  • In closing let me just say that I feel good about where we are now, and what lies ahead in the second half of the fiscal year.

  • I am encouraged by our continued strong revenue growth, particularly steady improvement in consulting, and the strong performance across our operating groups and geographic regions.

  • I am also pleased with our ability to address operational issues efficiently.

  • During the second quarter our people did a great job of managing the issues we discussed in the first quarter and bringing our metrics back in line.

  • That said, we still have some work to do, as Mike said, we have a strong focus on improving our margins.

  • Overall, the business outlook is good.

  • We are seeing healthy activity in our pipeline.

  • We are aggressively recruiting to fill thousands of open positions we have for high quality people around the world.

  • Our ability to recruit the best people continues to enable us to deliver superior quality work for clients, and differentiate ourselves in the marketplace.

  • Our leadership and innovation gives us significant competitive advantage and our high performance business agenda continues to resonate with our clients.

  • Looking ahead to the second half of the fiscal year, we believe we are well positioned to achieve our financial objectives, and to continue to strengthen the leadership position we have in this market.

  • Thanks again for joining us today.

  • Operator

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