埃森哲 (ACN) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to today's Accenture third quarter fiscal year 2005 earnings conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]

As a reminder, today's conference is being recorded.

I'd like to turn it over to our host, Managing Partner of Investor Relations, Ms. Carol Meyer.

Please go ahead, Ms. Meyer.

Thanks operator and thanks everyone for joining us today for Accenture's third quarter fiscal year 2005 earnings announcement.

With me today are Bill Green, our Chief Executive Officer, Mike McGrath, our Chief Financial Officer, and Steve Rohleder, our Chief Operating Officer.

I hope you have had an opportunity to review the news release we issued earlier this afternoon.

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.

Bill and Mike will then discuss our business outlook for the fourth-quarter and the full fiscal year 2005.

And then we will open up the call 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 certainties 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 conference call.

And during the call today, our speakers may reference certain non-GAAP financial measures, which we believe provide useful information for investors.

We will provide reconciliations to those measures to GAAP, and you can find those reconciliations on the IR page of our website at Accenture.com.

With that, let me turn the call over to Bill.

Thank you.

Good afternoon.

Before I describe our results, I do want to comment on the situation in London.

We have been tracking the situation closely throughout the day.

Our first priority has been to account for our people.

As most of you know, we have over 11,000 people in the UK.

We are checking with all of our UK-based employees, as well as our other employees, who may be visiting the country.

And we hope to complete this process very shortly.

At this time we know of no Accenture fatalities or injuries.

Our thoughts are with all those who have been affected by this terrible tragedy.

Now, let me turn to our results.

I am very pleased with our third quarter performance.

Our top and bottom line results are at record levels.

This is true for both consulting and outsourcing.

We are growing faster than the industry, having taken 5 to 6 market share points from our competition so far this year.

We had net revenues of $4.08 billion, the highest quarterly net revenue in Accenture history.

This represents strong net revenue growth in both U.S. dollars and local currency, and includes record revenues in both consulting and in outsourcing.

Consulting revenues reached 2.5 billion for the quarter, or 61% of total net revenues.

This represents a year-over-year increase of 7% in U.S. dollars, and 4% in local currency.

Outsourcing revenues were approximately 1.6 billion, or 39% of total net revenues in the quarter, a year-over-year increase of 16% in the U.S. dollars and 12% in local currency.

In addition to generating record revenues, we also delivered record earnings this quarter.

We exceeded our earnings per share goal, diluted earnings per share were $0.51, a new quarterly high.

This is up 38% from a year ago, and ahead of our expected range of $0.48 to $0.50.

Our adjusted operating margin for the quarter was 14.9%, bringing our year-to-date operating margin to 13%.

We continued to target 13% for the full fiscal year.

Last quarter we identified three challenges affecting our margin.

I am pleased to tell you, number one, we are on top of our contracts at the National Health Service in England, the NHS, and stand by our previous outlook.

Steve will provide more detail a little later.

Secondly, the cost overruns on reusable assets that we mentioned last quarter are behind us.

And lastly, our temporary delivery and staffing inefficiency increases have largely been resolved.

Our attrition levels are stable.

Our recruiting efforts are aggressive, and we expect to have over 120,000 employees by the end of the year.

Our new bookings for the quarter were just shy of 4 billion, with consulting particularly robust and slightly over 2.5 billion.

This is the second consecutive quarter that consulting new good bookings have exceeded that level.

Our pipeline is very strong, with both consulting and outsourcing up sequentially, already in the fourth quarter we have signed major multi-year contracts with the state of Texas and the U.S.

Army, with combined expected revenue for those two projects alone in excess of 1.1 billion.

We are aggressively expanding our global delivery network to go after the exploding offshore opportunities and applications outsourcing, where we see a significant opening to add incremental revenue with better-than-average margins.

Our recent acquisition of Cap Gemini's healthcare practice expands our capabilities, and positions us even better in the U.S. health care market.

Our balance sheet continues to be exceptionally strong, and we have repurchased or redeemed nearly 1.5 billion of Accenture shares since the beginning of the fiscal year.

Across the board, we are very well positioned, as we end the year and look to 2006.

With that, let me turn it over to Mike for some more detail.

Thanks, Bill.

Good afternoon.

The third quarter was a strong quarter for us, and I might add much improved over the prior two quarters.

We delivered record revenues, operating income, and earnings per share, we made improvements in addressing the issues that impacted our margins.

At the same time we were able to accrue modest variable compensation and keep our SG&A cost, and client balances and DSO's in-line with our objectives.

Our balance sheet remains strong.

Our cash flow continues to be healthy and our returns are among the best in the industry.

Bill has covered some of the highlights in his opening remarks.

So let me walk you through the remaining items on our income statement, balance sheet, and cash flow.

Gross margin was 34.6% for the third quarter, compared with 35.4% last year.

Our gross margin of $1.4 billion was a record high.

For the third quarter our SG&A costs of $804 million were 19.7% of net revenues, compared with 732 million or 19.8% of net revenues last year.

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

Let's go to the line item on our income statement titled 'Reorganization benefits and restructuring costs'.

The reorganizational liabilities established in connection with Accenture's transition to corporate structure in 2001, will either be reduced or increased in any quarter as final determinations and/or payments are made that vary from our expectations.

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

In the third quarter of fiscal year 2005, we recorded a net reorganization benefit of $66 million, which included a $73 million reduction in reorganizational liabilities, offset by $7 million in interest expense.

Impact of this to EPS is $0.07 for the quarter.

GAAP operating income for the third quarter was $672 million or 16.5% of net revenues, compared with $573 million or 15.5% of net revenues for the third quarter last year.

Excluding the reorganization items, operating income for the third quarter was $606 million or 14.9% of net revenues, compared with 575 million or 15.6% of net revenues for the third quarter last year.

The 14.9% operating margin for the third quarter puts us at 13% on a year-to-date basis, and we continue to target 13% operating margin for the full fiscal year.

Although part of the margin improvement can be attributed to expected third quarter seasonality, we also made real progress on the issues we have been addressing.

I would also like to note our operating margins are the highest in our proxy peer group.

We accrued $14 million of variable compensation expense in the quarter, bringing the total amount accrued year-to-date to $64 million.

We continue to expect to accrue up to $100 million for the full fiscal year.

During the third quarter our year-to-date effective tax rate declined from 32.3% to 31.1% due to the reduction in reorganization liabilities, which increases our pretax income but does not change income tax expense.

As a result, our effective tax rate for the third quarter was 24.9% compared with 34.8% last year.

Our balance sheet remains strong.

At the end of the third quarter our total cash balance was $2.77 billion.

Cash combined with $704 million of fixed income securities, classified as investments on our balance sheet was $3.48 billion.

This compares with combined balances of $3.76 billion at the end of the second quarter, and 3.15 billion at the end of last fiscal year.

DSO's for the third quarter were 47 days, which is consistent with our target.

Free cash flow, defined as operating cash flow net of property and equipment additions, was $524 million.

This is comprised of operating cash flow of $594 million, less property and equipment additions of 70 million.

On a 9-month fiscal basis, free cash flow was $1.13 billion, operating cash flow was 1.32 billion, and property and equipment additions were $187 million.

Total debt for the quarter was $72 million.

Our balance sheet metrics remained strong.

Return on invested capital of 44% in the third quarter ranks Accenture fourth against S&P 100 companies, and is well ahead of our proxy peer group average of 5%.

Return on equity of 48% ranks Accenture seventh, and return on assets of 16% ranks Accenture sixth against the S&P 100.

Also well ahead of our peer group average.

I want to comment briefly on our strategic financial architecture, including our share repurchase activities.

Details of our share repurchases will be in the 10-Q, and are outlined in the news release.

However, I want to note that during the third quarter we took advantage of market conditions and repurchased 12.8 million shares for $283 million in the open market.

In addition we repurchased or redeemed 19.9 million shares for $521 million from partners and retired partners, bringing the total value of shares repurchased during the quarter to approximately $804 million.

Additionally on June 7, after quarter end, we closed a tender offer initiated during the third quarter, and redeemed approximately 18 million more shares from partners and former partners with a total value of $408 million.

This brings our total repurchases for the year, including the June 7th transaction, to $1.45 billion.

For the balance of this fiscal year we expect to purchase or redeem between 250 and $350 million worth of shares, through both open market share repurchases and share and management plan transactions.

Before I turn the call over to Steve, I want to cover a few additional items.

We have completed the structural steps that are necessary for us to be in position to pay a dividend if our Board of Directors decides to do so.

We continue to examine the best way to return cash to our shareholders, and we're weighing the relative merits of share repurchases and paying a dividend.

As a matter of procedural housekeeping, we plan to file a redemption shelf registration statement with the SEC by early August.

Should we need it, the shelf would facilitate the issuance of Accenture limited shares upon the redemption of Accenture SCA shares.

I want to emphasize this shelf cannot be used to facilitate a secondary offering.

We're required to make this filing now to comply with certain SEC practices.

On July 1, we implemented a new senior executive trading policy which replaces our share management plan.

We covered this in detail in our proxy statement , which was filed December 2004.

This new trading policy is designed to continue to smooth the flow into the market of shares that our active partners received in connection with our incorporation in 2001.

We've taken this action to the benefit of public shareholders.

The existing transfer restrictions on these shares remain in place.

Now, let me turn the call over to Steve for some more detail on our operations.

Thanks, Mike, and good afternoon, everyone.

There are two areas I want to cover with you in the next few minutes.

First I'll comment on the performance highlights of our operating groups and geographic regions.

Second, I'll update you on some key elements of our operational agenda.

I'm extremely pleased with our U.S. dollar revenue growth across all five of our operating groups, and all three of our geographic regions.

In our financial services operating group, net revenue grew 21% in U.S. dollars, and 16% in local currency.

We saw double-digit growth in both consulting and outsourcing, and we're also seeing increased demand for our services, particularly in the banking and insurance industries.

Products grew 15% in U.S. dollars and 11% in local currency.

Building on a trend we first saw in the retail space, demand is strong for CRM and other front-office solutions from our consumer goods, pharmaceutical and automotive clients.

In the travel and transportation and industrial products segments, we see strong demand in BPO, back-office solutions, including HR, finance and accounting.

Resources grew 12% in U.S. dollars and 7% in local currency.

We're seeing strong growth in the energy sector from European headquartered supermajors, and growth in the European chemicals industry.

We also see steady demand for ERP based performance improvement and transformation.

Communications and high tech net revenues increased 2% in U.S. dollars, and decreased 1% in local currency.

While revenue growth was slow, operating income was an impressive 53% year-over-year.

We're seeing increased demand for our M&A related services particularly merger integration, which contributed to consulting and systems integration growth.

We're also seeing increased investment in new technologies, such as voice and video over IP.

The interest is on a global scale, and this area is a top priority for our large communications clients.

We've signed several new contracts to help clients put in the processes, systems and infrastructure to deliver new services.

And we've leveraged assets that we've created, particularly in our service delivery platform to help clients create and deploy these new services more rapidly.

Our government operating group had net revenue growth of 5% in U.S. dollars, and 2% in local currency.

While revenue growth in government was in the single digits, I want to highlight the market expansion of this group.

As Bill mentioned, government has two wins totaling $1.1 billion so far this quarter.

We continue to see strong demand for ERP solutions, and we're starting to see some interest from our clients in several key markets around the globe for immigration and security services, similar to our work for the U.S.

Department of Homeland Security on the U.S. visit program.

Looking at our geographic regions, in our Europe Middle East and Africa region or EMEA, revenue grew 17% in U.S. dollars, and 10 % in local currency.

We're seeing significant strength in Germany where we had double digit growth in both U.S. dollars and local currency.

We're also seeing strong growth in the UK, Spain, Italy and the Netherlands, and solid performance in some of our smaller markets, such as Belgium and Norway.

In our Americas region, we had 5% revenue growth in U.S. dollars, and 4% in local currency.

We're encouraged by our revenue growth in the U.S., our Grow America program is gaining traction in the marketplace, with new bookings in the U.S. up 17% over last year.

In Asia-Pacific revenues grew 2% in U.S. dollars, and were flat in local currency.

Now, turning to our operational agenda.

There are three areas I want to cover.

First, I want to provide an update of our offshore strategy; secondly, I want to highlight our success in people management, and third, I want to give you an update on NHS.

We have recently made an important decision in our offshore strategy to dramatically expand our global delivery network.

Here is some of the steps we're taking.

We're actively recruiting in key locations throughout our global delivery network looking at India, China and Philippines, today we have over 19,000 people.

Assuming demand continues, we see that growing to 30 to 50,000 people over the next three years.

Our approach is to defend and extend our position in the marketplace.

This means more aggressively going after and winning application maintenance and development work, allowing us to take greater advantage of labor arbitrage and cross-sell additional services.

This strategy will open new opportunities for additional work and will be accretive to our margins.

People are another important part of our operational agenda.

For the third quarter, utilization was 85%.

This is the ninth consecutive quarter in which utilization has been above 80%.

Attrition is stabilized, coming in at just over 18%, which is in-line with the second quarter.

Demand for our services continues to be strong and we're aggressively recruiting across all major markets.

Head count at the end of the third quarter was approximately 115,000 people, up 5,000 from the second quarter.

And we're on target to end the fiscal year with about 120,000 people which represents a year-over-year increase of over 16%.

While I'm on the subject of people management, let me update you on a change we're planning that will simplify our compensation structure.

For those of you who have followed our Company, you know that variable compensation attracts an undue amount of attention based on it's size as a percentage of our entire payroll.

For 2006, we will change to an annual bonus program that would be a component of our entire payroll, and will be paid to the top 20,000 people who are eligible, based on achieving corporate earnings and personal performance objectives.

Starting in fiscal 2006, the amount set aside for the annual bonus program will continue to be included in operating expenses, but will not be disclosed as a separate item.

Now, a big part of our operational agenda is maintaining and improving our operating margins.

One area that affected our margins is our NHS contracts.

Let me give you some additional perspective.

In May we agreed on deployment plans for 2005.

And we will continue to work on the program plans with NHS for 2006 and beyond.

Even though we are in the early stages of deployment, and this is a big program by most standards, we are already managing large volumes of information.

Today we are providing patient care systems that serve approximately 1.5 million patients, and more than 2500 health care professionals, including, doctors, community nurses, and hospital staff.

Our outlook for these contracts has not changed.

We continue to expect aggregate losses on the NHS contract to be from 110 to 150 million this year.

We continue to expect contract losses in fiscal year 2006, but it levels less than those expected this fiscal year.

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

In closing I'm extremely pleased with our revenue growth.

More importantly, operating income in three of our five operating groups grew more than 40% year-on-year.

Our operational agenda continues to maintain our focus on profitable growth, and I feel very good about the progress we've made in the third quarter.

Now, let me turn the call back to Mike for our business outlook.

Before I cover our business outlook, let me make a correction to one number I misspoke during my prior remarks.

The effective tax rate for Q3 was 29.4%.

I believe I said 24.9.

So 29.4% for the effective tax rate for Q3.

Turning now to our business outlook for the fourth quarter we expect net revenues to be in the range of 3.8 to $3.9 billion.

And diluted earnings per share to be in the range of $0.34 to $0.37.

For the full fiscal year, we expect net revenue growth of approximately 13% in U.S. dollars, and 9% in local currencies, which is at the low end of the range we previously provided.

We believe we are well positioned to outperform the industry, which is forecasted to grow between 7 and 8% in U.S. dollars.

We expect diluted earnings per share for the full year to be in the range of $1.52 to $1.55.

Reductions in reorg liabilities are expected to contribute $0.12.

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

We expect operating cash flow to be in the range of 1.8 to $2 billion, property and equipment additions to be $350 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 year in the range of 18 to $20 billion, what we think is likely that new bookings will be at the low end of this range.

However, consulting will continue to dominate new bookings for the year which we believe is sufficient to support our growth for next year.

There was one last item I want to cover.

As you begin to build your models and develop your estimates for fiscal year 2006, please keep in mind that we will begin expensing stock options next year.

If we had expensed stock options this year, we estimate that the annual impact would have been approximately $0.15 to $0.16 per share.

We will provide you our business outlook for fiscal year 2006, when we announce our year end results in October.

Let me turn it back to Bill.

Thank you, Mike.

Before I open it up for questions, let me just recap the third quarter.

I feel very good about our business.

Our metrics are all heading in the right direction.

Our strong performance demonstrates both our ability to deliver value to our clients and shareholders consistently over time.

The momentum in consulting continues to build, the third quarter saw the highest quarterly net revenues in consulting in our history, and the second straight quarter with consulting new bookings of 2.5 billion or better.

We continue to improve operating margins, hitting 13% year-to-date, and we're expanding our pipeline.

Pricing is stable.

Attrition is stable.

Utilization is strong.

We continue to recruit and retain the best people, and our balance sheet remains among the strongest in the business.

Now, let's take some questions.

All right.

Operator, I think we're ready to start, please.

Certainly.

Once again, ladies and gentlemen, press star-1 to ask a question.

Our first question will come from the line of Adam Frisch with UBS.

Please go ahead.

Good afternoon, guys.

I just wanted to delve into operating margin a little bit.

I know the target remains 13% for the year.

I just wanted to clarify if that includes or excludes the reorg benefit.

Adam, we are targeting 13%, absent the reorg benefit.

Absent the reorg benefit.

So that means fourth quarter would have to be close to about 12.9% or so, to get to 13% for the year.

13 basically.

I mean, we're at 13, so we need to be at 13 for the year, basically.

Okay.

So what gives you the confidence that you can achieve that in what has been a volatile quarter?

I know last year the operating margin in the fiscal fourth quarter, I'm just checking my model here, was only 11%.

You have to be significantly higher.

You may recall last quarter we had an anomaly in the tax thing which we used to put some variable compensation on the table for our people, and the operating margin pre-variable compensation, Q4 last year, from memory was 14.6%, so we started off from a pretty strong place.

We think as we've said, that we've put this year largely essentially behind us.

The NHS is within the guidance that we have previously given.

We have told you about variable comp, and we think that we have the ability to manage the business and bring home 13%.

Okay.

Adam, this is Bill, if I can just add one thing.

We put that 13% number on the table, and we did it deliberately and we did it very seriously.

That's a commitment that we're going to do everything we can to achieve, and that's a commitment that we're going to make decisions that are in the best interests of our shareholders in order to achieve that.

So I just wanted to make sure that you understand that is something that is very important to us, and that we're driving to.

Okay.

Thanks for that.

And then just one more question on consulting growth and then I'll turn it over.

Little over this quarter at about 7.4%, prior quarter is worth 13% plus, but it was a very difficult comp year-over-year.

Are you expecting consulting growth to accelerate in the fourth quarter because now bookings, two quarters in a row are strong, pricing trends are working in your favor?

Should consulting growth get stronger in the next quarter?

And if you can give more color on pricing.

Is it up or stable?

This is Steve.

Let me answer both your questions here.

First of all, on the consulting bookings, I think you can expect for Q4 that you'll see a steady number, based on what we've seen in the pipeline and what we're arranging, while we had strong sales so far in outsourcing, I think you'll see a steady number in the consulting bookings number for Q4.

On pricing, we're actually up about 120 basis points over last year, and I would characterize pricing as stable as well.

We haven't seen any large increases or decreases from Q2.

So--

It is up 250 basis points I think you said, right.

Yeah.

But it is still up but not as much.

Right.

Should consulting growth get back to double-digit kind of growth in the fourth quarter, or should we expect it to kind of be in the 7.5% range?

Somewhere in between I think is the right answer.

Okay.

Thanks, guys.

Thank you, Adam.

Thank you very much.

And next we'll hear from the line of--pardon me, one moment, Gregory Gould with Goldman Sachs.

Please go ahead.

Thanks, guys, I guess on the bookings, I'm a little worried.

The target for the year going to the lower end of the range, what accounts for that?

And I understand consulting is--helps revenue faster or converts to revenue more quickly, but what does this mean for fiscal 2006?

I don't want to nail you down on a revenue number yet, but should we be thinking about below 10% total revenue growth for fiscal '06?

Well, Greg.

After the years of flat bookings.

Greg, let me give you some perspective on that.

First of all, the demand environment remains very healthy.

Our pipeline continues to be strong sequentially up both in consulting and outsourcing, and the place is buzzing with activity.

Bill, what does that convert to bookings?

Well, let me just explain that through.

All right.

The consulting business coming back is an important element to us, and so the pipeline being rich is an important measure that we use.

Secondly, we're in the process of looking at 2006 ourselves, and we feel good about our early look ahead at 2006, in terms of the activity that is in the pipeline and the things that it can converge, especially the bigger deals in Q1 and Q2 of next year.

So that gives us a lot of confidence that we have the pipeline there, we have the close rate.

Our competitive win rate is increasing.

There is a mix shift to more consulting.

We think that will continue.

But, frankly, we feel good about Q4, and we feel good about the number we'll put on the table for '06.

I think that one of the things that we had explained before is that we do see over time consulting growing in the high-single digits.

We would like to get it better than that, but that is what we see, and we see outsourcing growing in the range of the high teens, and as a result I think you get in the space not unlike we did this year of the sort of, you know, 9 to 12 kind of growth rate, and we're very relaxed about that.

Okay.

Good.

And, Mike, on the FX impact, if the dollar stays where it is, are we looking at about 2 percentage point drag to firm- wide revenue growth in fiscal '06?

I think one to two percent, yes, based on that.

We haven't plumbed that entirely but that would certainly be in the ballpark, Greg.

Okay.

Thanks.

One last question.

The Americas, I know that this year you've had to absorb the rolloff of the AT&T contract.

What kind of growth rate do you think is sustainable over the next couple of years for that geography?

Steve again.

We have targeted double-digit growth in the U.S. specifically, not singling out Canada or Latin America, but frankly that is the target that we're shooting for.

Okay.

Thank you.

Thank you very much.

Next we'll hear from the line of Andrew Steinerman with Bear Stearns.

Question for Steve on the NHS contract.

There was discussion about new deployment schedules, and I don't quite understand how new deployment schedules help out Accenture.

My thought would be, when you reach your milestones, you reach your milestones, and really it is not a matter of when they're due, but rather when you could deliver them.

Can you just articulate a little better how new deployment schedules are helpful to Accenture?

Does it help Accenture to get get paid sooner?

Or is it just a clearer expectation?

First of all, it is a clearer expectation, because of a number of the ways I alluded to when we were talking about the Q2 results, it was important for us to get stability and agreement on how we were going to deliver the systems that we had contracted for in 2005.

You may recall, you may not, but just for the record, our payment is tied to the deployment of these systems, and those are the major milestones.

So to the extent that we can have stability around that and deliver on those, we obviously are able to bill and collect from our work.

So does that help?

But my question is, with new deployment schedules, how does that help?

Is it a-- you will get the work deployed as quickly as possible, and if the due date is sooner, if the due date is later, you're really still going to do the work as soon as possible.

Well, there is a number of dependencies on delivery of those systems.

Not the least of which is the readiness of the authority and the users to accept that.

We have technical constraints.

We have people that we have to train.

So we want to deploy the systems in a thoughtful way, so that they're accepted by the users.

That is really what's guiding it.

Not necessarily-- we obviously would like to go as quickly as possible, but we also want to be successful with the deployments.

Can you finish off the thought, from now versus April, how do you feel like user acceptance is going for the centerpiece of the work?

Going very well, very well.

Thanks for the color.

You bet.

Thank you very much.

We'll hear from the line of Moshe Katri with SG Cowen.

As a follow-on to Andrew's question, what can give us-- can you give us some comfort levels here, that the renegotiations on NHS are more of a long-term solution to what happened last quarter, i.e., are we going to have--what actually can give us a guarantee that we're not going to have a recurring issue on an annual basis, looking at NHS at this point?

I'll stay with the guidance that I put out there and that we put out there in Q2, the fact of the matter is, that we've based all of our estimates this year on the 2005 deployment schedule.

We've now got that nailed and we're delivering against that, so that will box the financial numbers that we put out for Q2, and reiterated in the discussion we just had.

We're in the discussions with the authority right now for 2006, and I'm not going to put a firm date out there of when those will be resolved but they want to get them resolved as quickly as we do, so we can set the trajectory of 2006, and we're sticking to the assumptions that we've made for 2006 to be an improvement over 2005.

And frankly, 2007 to be an improvement over that.

Okay.

Just as a followup to Greg Gould's question about the bookings.

It seems that for about a year now we've seen smaller bookings, in kind of composing your booking number in transformational outsourcing, and I think it seems that you kind of refocused your efforts away from the larger maybe megadeals, and you're focusing more on the smaller ones that are less risky to execute.

Am I making any sense here, you're doing that voluntarily because your core business is actually picking up?

This is Bill.

Let me just give you a sense.

If we're focusing on anything in outsourcing, it is a profitable deal.

Yes.

That has been job one for us.

I mean, you guys expect that of us.

It's easy to go by bookings.

The thing is that you have to live with them for maybe a decade.

And so what we have looked at very closely, is the quality that's in our pipeline, the economics through our capital committee of the new deals we sign.

There is more small and mediums.

There are more small and medium-sized deals in the marketplace, that's true.

There is more velocity in the marketplace, that's true.

But the thing that we're looking most closely at is our ability to drive incremental revenue that's profitable on those deals.

And that's the thing that we've really established over the last few years, rigor and discipline about, and we think it serves us and our shareholders much better.

And then finally, in terms of your pretty drastic shift in your offshore strategy, in terms of looking at your plans for expanding your head count overseas, Steve, I think you mentioned the fact that you feel that the margins from some of those deals that you'll be pursuing are higher than the corporate average.

Two things: What sort of scale at this point do you have in those businesses is your cost base efficient overseas, specifically in India?

And, two, is there any way you can give us a feel on what margins we're talking about on some of those deals?

I'm not going to break out the margins separately, but I will talk about the cost base, because I think our model is significantly different from some of the other players in the market.

Specifically, what we're utilizing is a multi-site location--offshore location.

If he we get into a situation, for example, in India where a specific city has reached saturation from salary standpoint, and from a cost structure standpoint we have the flexibility to move and to grow a different location, not only within India, or China, or the Philippines, but also say outside say Eastern Europe or Latin America, and we have actually started that process as well.

The key to the success of this strategy, I think, is our flexibility and our ability to consistently deliver outstanding solutions in an offshore environment with consistent methods and consistent quality, and we've been able to demonstrate that we can do that location by location throughout the global delivery networks.

I just put that out there as a kind of a big differentiator for us.

Thanks.

You bet.

Thank you very much.

Apologize for that mispronunciation, Mr. Katri.

We'll hear from the line of Rod Bourgeois with Sanford Bernstein.

I want to talk a little bit further about the offshore strategy.

By the way, I don't applaud very often, but I do applaud the plan to take the offshore capability to the next level.

On that note, can you talk about your early progress with the new offshore strategy, can you give us an idea how the cross-selling is going, kind of early in this process where you have a more dedicated salesforce to sell those services?

Can you comment on that early progress?

Yes, this is Bill.

Let me start and then I'll turn it to Steve for some of the mechanics of it.

Importantly over the last several months, we asked Karl-Heinz, who ran our financial services business to take over something we call technology and delivery, and that is the end-to-end delivery of solutions for our clients, and part of that has to do with our offshore capability and our offshore workforce.

The second thing that is very clear to us, if there is one thing Accenture is exceptionally good at, it is attracting, skilling, retaining and deploying people to get work done.

I think that we've gone from, you know, a few thousand to 19,000 people offshore.

The question was, are we prepared to take this thing to the next level?

And importantly from our analysis and our work, we can scale this thing to double or triple its size in the normal course of business.

And that was an important finding for us, and an important thing and the demand is there from our customers for us to do it.

So a lot of this is, you know, fairly new, getting launched, Karl-Heinz has been in place for about two months.

We have put more power from across our operations into the technology and delivery organization, and they are right now in fact mobilizing to execute against this plan, and so I think, you know, it will be--you know, some amount of months, before we see more and more traction.

But we have in fact piloted everything that we plan to do, and we have gotten terrific results and yield from those efforts.

Let me let Steve give you a little more detail.

Hey, Rod, two things I would add to what Bill said.

First of all, in terms of scaling, those plans are well under way.

In fact, in May we hired a record number of employees in India at about 1600.

I think that that's a clear demonstration that we just extended the business and we are going to continue to push that in other locations as well.

The stage we're in right now, frankly, now that we've shaped the program, shaped the strategy, is communicating out to our partners and really operationalizing it, and you'll see that in the next 2 to 3 quarters, as we push out what we're going to do, in terms of targeting clients, what type of work we're going to sell, and how we get the support structure in place, to support the partners that are pushing into this market expansion for us, so it is still early stage.

We're in the shaping and communications stage right now but there will be more to come in subsequent quarters.

Just to follow up or clarify on this.

Can you help us understand when you look at the new work that is being sold in your sort of offshore capability areas, is that work additive to your existing client work, or is it sometimes coming with a cannibalistic effect, where you're seeing a deflationary pressure attached to that?

Can you help us understand how much of the offshore work is additive versus cannibalistic?

That is a very good question and that is what we looked hard at, when we made some decisions about this strategy.

And frankly, if you look at the work we've added there, most of that is incremental revenue and profits.

We continue to hire aggressively in countries like the United States and the UK, in order to support our work that is on-shore.

But the majority of our work that we're contracting and performing on behalf of clients in our offshore facilities, is work that we would not otherwise have been doing.

So once we had a track record of that, experienced that, and understand the different services that we offer and the different price points that we offer,, we felt comfortable with going ahead, because this is about incremental profits and incremental revenues.

Great.

One final question on the dividend.

Can you give us any sense for how large the dividend could be if you end up going down that path?

Or how can we think about the process you're going through to decide, you know, how large the dividend might be, any way to scale that for us a little bit?

I would be out in front of the Board to give you a number.

I wouldn't say you could look at the tech sector if that is how you think we operate or the view of dividends in which that sector pays, but we're still looking at the trade-off between dividends and share repurchases and trying to make sure we make the best decisions on behalf of our shareholders is how we allocate the cash.

I don't want to get out in front of our Board's deliberations on this.

The best thing to do is to look at benchmarks in the tech sector.

If I look at your cash flow and your cash balance, I can see a propensity to pay a dividend even greater than what you see in the overall market, but maybe we should start with other benchmarks, and that is the best place to expect something in terms of the dividend for next year?

I have made no commitment to we're paying one next year.

We're still continuing to discuss whether that is the right thing to do in terms of use of cash.

If he we get that far, it would be the tech sector where we start our thinking in terms of launching this program.

Great.

That is helpful, thanks, Mike.

Thank you very much.

Next we'll go to the line of Bryan Keane with Prudential.

Mr. Keane, one moment, please.

Good afternoon, I just want to hit the offshore strategy.

The one bear story on Accenture is always going to be they're moving all this offshore and they are going to have to take the lit.

I know we discussed it, but I want to see if we can explain it a little bit better, because if we do have this big push offshore, we're going to see actual revenue growth increase, and I think some of the reasons might be because if you give a client lower rates offshore, they would take those extra dollars and give them to you guys in other services, how do we think about that?

Immediately you think it is lower rates and that means lower revenue.

This is Steve, let me comment on that, I think you're on the right track.

Our idea when we were laying out the strategy, as Bill commented on, was that this was additive work, and was considered a market expansion.

While it may add some work at lower rates and comparable margins, our feeling very strongly, is that it will give us an opportunity to cross-sell our consulting and systems integration services and outsourcing services, frankly, at a larger rate into some new clients.

So we fully expect that we'll be able to take advantage of the business consulting and systems integration outsourcing model that we've got as we penetrate some of these newer clients.

Steve, have you been surprised the fact that it hasn't cannibalized you guys more?

Seems like Accenture might have been hesitant to go offshore, and now it seems like the effect wasn't as dramatic as you thought, and now you want to expand?

This is Bill.

I want to give you some examples, and your other question.

You know, first of all, frankly, we have been surprised and we were uncertain how that was.

We do very much see the distinction between the work that we do which has different value propositions, different outcomes, the price is different, it's delivered different, by different skill sets, and so all of that was important.

I think what's important to us was to get real-life experience in driving this, and you know we got to the point when we passed 15,000 people and we did it, you know, if you look back on it in a fairly natural way, sort of month after month, we just realized that this was an important element.

But I think it translated into plain language is, if you look at a client relationship, let us say here in New York, that we do between 30 and $50 million a year of system integration and consulting work for them.

What this does, is give us an opportunity to do an extra $50 million of work in services that we would do through an offshore facility that we wouldn't do today.

So we've been kind of inching towards that, but this gives us an opportunity to be able to take that capacity on and execute it in a first-class way, and still give our clients sort of the integrated Accenture solution in a much more competitive profile.

So that's why we see the work is very incremental, because when you look at it on a client-by-client basis, that is in fact how it manifests itself.

That's helpful.

Maybe some comments on the competitive environment especially an update on what you're seeing out of IBM, since they made some aggressive comments last quarter.

I've seen they had aggressive comments and I think there is probably aggressive behavior to go with it.

At any point in time there is, you know, people that act in the marketplace and you scratch your head about what you're doing.

I think what we have tried to focus on, is that we're in the business to deliver real value, and real value is worth money, and we deserve to make profits on it and that's the business we're in, and that's what we stayed the course on.

Our competitive fights have still yield results that we expect to yield, but importantly as I mentioned before, profitability matters to us, and so we've been very diligent about the work we do, we've been very diligent about the pricing, and ultimately diligent about the results that we get.

So I think, you know, at any point in time there's always one or two people in the marketplace that are, you know, moving aggressively to get into new space.

You know, it would not be unnatural for us to do that, as well.

But I think, you know, the market continues to be competitive and challenging and it's important to be differentiated in your services and deliver real value and real outcomes at the end of the day, and that has served us well to date and we believe it will continue to.

Okay.

Great.

Thank you very much.

Next we'll hear from the line of David Togut with Morgan Stanley.

Thanks for taking my question.

Can you comment on pricing trends and outsourcing, drilling down a little bit into HR finance and accounting and procurement?

Yeah, David, this is Steve.

What we've seen across the outsourcing waterfront is really pretty steady pricing right now.

I would tell you that the deals, the multi-towered deals that we are chasing, have been fairly stable from a pricing standpoint.

We haven't seen any difference either lower or higher, as a result of some of the break-ups that are being done out there.

Frankly, the capability is being delivered pretty much at the same price point across the waterfront.

On a year-over-year basis, pricing is approximately flat?

Yes.

Can you provide some color on where you are in the maturation and margin profile of your outsourcing portfolio as a whole?

As you look at the portfolio, is it trending to about to where you expected when you signed the original contracts, and perhaps just add some color on the risk profile of the deals in the portfolio?

Well, I don't think that there is anything to note around the risks.

As Bill alluded to, The deals we have been putting through our that capital committee, all have a similar risk profile.

We actually score each one of them.

And those deals that are too risky or that exceed the profile, and the financial metrics or--and don't meet the financial metrics, don't make the cut.

So from a risk standpoint, I wouldn't say that we've assumed any higher risk.

From an overall maturity standpoint I would say that, again, the deals that we have with the exception of NHS, are tracking per the estimates that we put in place.

In terms of the blend, you know, we've got about a 60/40 blend outsourcing and consulting.

In any given year the market is going to drive that to different levels, but frankly we've seen it pretty steady over the last couple of quarters, and given our pipeline, it could inch up or inch down, but I expect that's going to stay pretty steady.

Okay.

And then on the turnover, what are the turnover statistics you're seeing in the offshore workforce?

In our offshore work force they're about the same, roughly 20, low 20% in our offshore systems integration group in India and Manila.

So we haven't seen any change, any spike or decrease in those numbers.

And just, finally, Mike, you highlighted what the operating income would be from NHS, what would be the operating cash flow impact this year?

We put on estimates that he we thought our balance sheet would be, you know, in the $400 million range by the end of the fiscal year, and I think we'll still be around that same place.

Can you clarify a little bit when you say 400 million?

I'm talking about how much we have on our balance sheet for the NHS account as of fiscal year end.

I think the range, David, just to--what you should do is anchor back to the range we had in Q2, and I believe it was 400 to 450.

I see.

And we're still on track for that.

Okay.

Thank you.

You bet.

Thank you very much.

And we will next hear from the line of George Price with Legg Mason.

Hi, thanks very much.

A couple questions, one, getting to the back to offshore, curious if there are any particular drivers, you know, maybe helping you move along to being more aggressive on the offshore, application outsourcing.

For example, are you finding that trends in say the BPO market, that BPO is pulling more application work in, say from ITO contracts, or standalone application outsourcing deals?

Are clients more comfortable with you as a large global player versus, you know, maybe other firms out there?

Are they not getting as good work as they thought maybe from some of the Indian peer plays?

Any of that going on?

This is Bill.

You know, I wouldn't judge the other firms.

I would say this: Our clients have an expectation.

If you look at our clients expected us to move offshore more aggressively than we did.

And we moved pretty aggressively.

I think importantly to us is our offshore initiative has been tremendously successful.

Probably one of the most, you know, dramatic undertakings we have ever taken in the history of the firm, and it works exceptionally well.

We have the interchange.

These people not only operate offshore, and get the benefits of that, but importantly are part of the Accenture global network, right, in terms of our values, our quality, our economics, what we do everyday.

We frankly just looked at it when we looked for opportunities for growth.

This was one of many opportunities for growth we had and it was sitting right there, and we had proven to ourself we could do it, we could do it without making a dramatic investment, and we could execute it profitably.

That is the thing that really moved us to move more aggressively here.

That and being responsive to our customers.

Okay.

But, you know, I guess on the BPO side are you seeing, you know, BPO deals pull in application work from other areas?

Is there some expansion maybe even in the existing base of business that you're ramping up?

I would say no.

Interestingly, we look at the work, whether it is system integration work or BPO work, we look at what we need to deliver and we look at where is the best place to source the capabilities to do that delivery.

That has become just a natural act within Accenture.

A lot of expansion offshore is not necessarily in response to something in BPO.

BPO will continue to grow.

The pipeline looks good and a lot of that will be leveraged in one of our offshore locations, and not necessarily the three that Steve mentioned, but for instance, Prague for finance and accounting and other places like that.

So I think it is just kind of a natural business model for how we get things done, and how we execute global sourcing on behalf of our clients, to get the capability right and the cost price point right.

Okay.

On the macro front, obviously based on the tone of your commentary on consulting, it doesn't seem like you're seeing clients become more cautious or jittery, but, you know, we do have obviously some concerns about controlling economic growth, higher oil prices, I'm sure at this point, and things like terrorism don't help.

Are you seeing clients becoming any more, you know, cautious on certain types of expenditures, particularly consulting and if they are, how are you addressing, you know, those issues and still able to, you know, see a robust demand environment?

I guess I would say, you know, in all honesty, if you look at the last 18 months, all clients have become more diligent about their expenditures.

Every company I know.

But that works to our advantage because that says companies are looking for bullet-proof business cases.

They're looking for outcomes that they can take to the bank.

They're looking for a supplier that will put their money where their mouth is, in terms of performance and delivery.

And as a result he we haven't seen, you know, an economic-driven falloff.

We've seen, frankly, very smart clients making very smart decisions in a priority way, about what are the things that they're going to invest in to improve their business performance.

The thing that Accenture has to do, is continue to be relevant to those companies, and about being relevant is about having differentiated products and services that generate real business outcomes that they can take to the bank.

And, you know, so our focus everyday when we get up on the consulting side of the business, is to put propositions and ideas and innovations on the table that do that.

And that's what we're focused on, and frankly that's what has driven a lot of our consulting business.

A lot of the work that has come in, in consulting, is I would say traditional consulting work, however, very outcomes-oriented and that is our sweet spot.

Okay.

Last thing just to follow up to the fiscal fourth quarter EPS guidance, can you just give us a little bit more clarity on, maybe on assumptions around the tax rate and share count?

Thanks.

The tax rates will be in the range that I cited for the year earlier.

The share count from memory our year-to-date share count is somewhere in the 900, average share count is somewhere in the 960 range for the fourth quarter.

It is somewhat below that.

I think it is somewhere in the 940 to 950 million range of shares.

As I look at it right now.

Okay.

Thank you.

All right.

Operator.

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

That will come from the line of Ed Caso from Wachovia Securities.

I was curious to get a better feel for the continued success you've had in Europe, despite all the comments you continue to hear about how things are difficult in Germany, and things appear to be getting worse macro-wise in the United Kingdom.

Okay.

This is Steve, again.

Commenting about Germany, as I said in the comments, this is the second quarter in a row that we have had double digit growth.

I think what we're seeing in Europe, and specifically in Germany, Spain and Italy, is a real sharp focus on growing our geographic footprint in those countries.

We've had a strong presence in the past.

We've actually gone to market across our operating groups, and this year we put one of our senior partners in charge of really focusing on deep penetration in our Western European marketplace, and I think we're seeing the dividends of that both in bookings and net revenue growth.

In the UK, you know, we've had strong growth across all five of the operating groups.

Obviously we've had some challenges as well, in terms of profitability, but none of that has overshadowed the continued demand in the UK, and it continues to be our second largest geographic market.

Frankly the pipeline is very strong there.

We've got a number of large opportunities, as well.

So we're not seeing the softness there that others may.

Thank you.

Okay.

Well let me just take a minute and wrap up here.

Thanks everyone for joining today.

I would just tell you in closing I feel very good about our progress that we made in the third quarter, and our prospects for the rest of the year, I am very pleased with the growth we're seeing, particularly the momentum in our consulting business.

The business outlook is very positive.

Our pipeline is expanding.

Our recruiting is robust across the board.

We have a lot of momentum and enthusiasm in our Company.

Last week I met with 50 partners from around the globe who have been working on our leadership and our strategic plan.

I was inspired by the ideas they generated, and by their enthusiasm.

These are people that are next-generation leaders and will own the execution of this strategy.

Constantly refreshing our strategy and thinking about our strategy is fundamental to becoming a high performance organization, and I am excited about the growth prospects that they're bringing forward.

I also want to make sure that you know that Steve, Mike and I, as well as our broader leadership team, are available and happy to talk to you.

So please call Carol to make any arrangements you would like to chat with any one of us.

Thanks very much to everyone for joining us today.

Thank you, operator.

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