埃森哲 (ACN) 2006 Q1 法說會逐字稿

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  • Operator

  • Welcome to the Accenture's first quarter fiscal year 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Managing Director of Investor Relations, Ms. Carol Meyer.

  • Please go ahead.

  • - Managing Director IR

  • Thank you operator.

  • And thanks, everyone, for joining us today for our first quarter fiscal year 2006 earnings announcement.

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

  • And I hope you've 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.

  • Mike will take you through the results in more detail.

  • And Steve will add some operational perspective.

  • Mike will then take you through our business outlook for the second quarter and the full fiscal year.

  • And Bill will provide a brief wrapup before we take questions.

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

  • Some of the matters we will discuss on this call are forward-looking.

  • And you should keep in mind 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 and other filings with the SEC.

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

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

  • You can find reconciliations of those measures to GAAP in today's news release and on the Investor Relations page of our Website at accenture.com.

  • So let me turn the call over to Bill.

  • - CEO, Chairman of Exec. Leadership Team

  • Thank you, Carol.

  • And let me first take the opportunity to wish everyone a very happy New Year.

  • We had a great first quarter and are off to a terrific start in the new fiscal year.

  • We achieved the highest quarterly revenues in Accenture's history and established new records for both consulting and outsourcing revenues.

  • We delivered $0.36 in earnings per share, a double digit increase over the first quarter of last year.

  • We recorded 5.54 billion in new bookings for the quarter, our highest in seven quarters, with strong bookings in both consulting and outsourcing.

  • Our continued commitment to margin improvement enabled us to expand our operating margin by 90 basis points on an options adjusted basis.

  • We maintained our strong balance sheet and generated 290 million in free cash flow.

  • At the same time, we continued to return cash to shareholders.

  • In the first quarter, we repurchased 52 million shares of our stock for a total 1.15 billion.

  • And we paid our first cash dividend.

  • The global demand for consulting and outsourcing is strong.

  • Companies and governments around the world want to work with us because we have a well established track record and a proven ability to deliver results and to do so consistently.

  • We remain committed to helping our clients build high performance businesses and committed to Accenture's high performance, continuing to build value for our shareholders.

  • Accenture's ability to reach new levels of performance is a testament to our continued focus, both on execution for today and on ongoing relentless positioning of ourselves for the future.

  • We are just beginning; just beginning to see the yield from the convergence of several factors.

  • Improving market conditions in terms of demand and pricing, an unequalled set of client relationships and opportunities.

  • A proven winning best in class set of service offerings, for winning within each growth platform, and winning across broad transformation programs.

  • And at proven operational capability.

  • I'll be back in a few minutes but for now, let me turn it over to Mike who will provide you more detail on our financial performance for the first quarter.

  • - CFO

  • Thanks, Bill, and good afternoon.

  • Q1 was a great quarter for us.

  • It started with strong bookings and ended with a solid top and bottom line.

  • Bill already give you the top line on bookings and Steve is going to provide more detail in his comments.

  • So I'll walk you through the income statement, balance sheet and cash flow and give you a little more detail behind the numbers.

  • For the first quarter, net revenues were $4.17 billion, up 12% in both U.S. dollars and local currency, and at the upper end of our expected range of $4 to $4.2 billion.

  • Breaking that down by type of work.

  • Consulting accounted for $2.58 billion, or 62% of total revenues.

  • A year-over-year increase of 8% in U.S. dollars and 9% in local currency.

  • Outsourcing accounted for $1.59 billion or 38% of total revenues.

  • An increase of 18% in both U.S. dollars and local currency.

  • As we've said before, on September 1, we began expensing stock options and employee stock purchase plans.

  • Given this, I'll be taking you through the year-over-year comparisons using the options adjusted numbers for relevant metrics for the first quarter of fiscal year 2005.

  • This will provide a more meaningful apples to apples comparison.

  • Full comparisons to GAAP figures can be found in our news release and in the Financial Statements in the 10-Q that we will be filing in a few days.

  • With that in mind, let me take you through the rest of the income statement.

  • Gross margin for the first quarter of fiscal 2006 was 31.7%, compared with options adjusted gross margin of 31.8% for the first quarter of last year.

  • SG&A costs for the first quarter were $802 million, or 19.2% of net revenues.

  • An improvement of 100 basis points compared with options adjusted SG&A of $752 million, or 20.2% of net revenues for the first quarter of fiscal 2005.

  • GAAP operating income for the first quarter was $513 million, or 12.3% of net revenues.

  • Compared with options adjusted operating income in the first quarter of 2005 of $427 million, or 11.4% of net revenues.

  • On this basis, operating income in the first quarter of this year increased 20% in dollar terms, and expended 90 basis points as a percentage of net revenues.

  • Our effective tax rate for the first quarter was 37.4%, consistent with our expected annual range of 35% to 38%.

  • Income before minority interest for the first quarter was $328 million.

  • Compared with options adjusted income before minority interest of $297 million for the same period last year.

  • Diluted earnings per share for the quarter were $0.36, a year-over-year increase of 20% on an options adjusted basis.

  • We exceeded the top end of our expected EPS range by $0.02, with $0.01 due to the effect of our discounted share repurchases and redemptions during the quarter.

  • Now, let's look at our cash flow and balance sheet.

  • For the first quarter, free cash flow, which is defined as operating cash flow net of property and equipment additions, was $290 million.

  • This included operating cash flow of $368 million, less property and equipment additions of $78 million.

  • Our business continues to generate significant cash flow.

  • Our free cash flow yield was approximately 8% on a rolling fourth quarter basis, which was four times the average of the six companies in our proxy peer group.

  • Our total cash balance at November 30, 2005 was $1.69 billion, compared with $2.27 billion at November 2004.

  • Cash combined with $462 million of fixed income securities, classified as investments on our balance sheet was $2.15 billion at November 30, 2005.

  • Compared to a $3.21 billion at November 2004 and $3.18 billion as of August 2005.

  • The decrease in cash was primarily due to our share repurchases and dividend payment in the first quarter.

  • Total debt at November 30, 2005 was $54 million, down from $75 million at August 31.

  • Our balance sheet and associated metrics continue to be strong.

  • On an options adjusted basis, our return on invested capital is 55%.

  • Our return on equity was 60%, and our return on assets was 16%.

  • Days services outstanding, or DSO's in the quarter were 47 days.

  • In line with our target and down from 55 days in the first quarter last year and 49 days at the end of the fourth quarter.

  • Before I hand it off to Steve, let me cover a few things we did in the fourth quarter to meet our commitment to continue to return cash to shareholders.

  • On November 15, we paid our first cash dividend of $0.30 per share.

  • In the first quarter, we also repurchased 52.2 million shares for a total of $1.15 billion.

  • As a reminder, 46.4 million of these shares were acquired at a discount.

  • This includes 35.9 million SCA shares, as well as approximately 10.5 million limited shares acquired from former partners.

  • As of November 30, we had $1.3 billion of share repurchase authority remaining.

  • From time to time, I get questions about the size of our public float.

  • Given our share repurchase activity in the first quarter, and using what we believe to be the most conservative method of calculation, our public float is now approximately 54%.

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

  • - COO

  • Thank you, Mike.

  • And hello, everyone.

  • I'm going to comment on the performance highlights of our operating groups and geographic regions.

  • Cover some of our standard business metrics and key operational drivers.

  • And then I'll turn it back to Mike for the business outlook.

  • In the first quarter, all five of our operating groups achieved revenue growth in both U.S. dollars and local currency.

  • Products, resources and government fueled this growth, with each achieving double digit revenue increases.

  • Products turned in a strong performance, growing revenues 18% in U.S. dollars and 19% in local currency, and exceeding $1 billion in revenue for the first time in any quarter.

  • The revenue increase was primarily due to strong growth in the Americas region, mostly in our health and life sciences and retail industry groups.

  • In resources, revenues grew 15% in U.S. dollars and 14% in local currency, due mainly to strong performance in chemicals, energy and natural resources.

  • We continue to see demand from the energy supermajors for systems integrations services.

  • Our government operating group grew 14% in U.S. dollars and 15% in local currency.

  • This growth was driven by outsourcing, primarily in the Americas and Asia-Pacific regions.

  • Communications in high tech, with revenues of 1.05 billion for the first quarter, continues to be our largest operating group.

  • Growth of 8% in both U.S. dollars and local currency was driven largely by the Americas and EMEA regions.

  • In financial services, revenues increased 6% in U.S. dollars and 7% in local currency.

  • While the results in financial services were lower than our expectations, our asset-based strategy is gaining momentum.

  • A great example, is the work we're doing to help China Minsheng Bank build a world class core banking system.

  • China Minsheng Bank is the first privately owned nationwide commercial bank in China.

  • Now, looking at our geographic regions.

  • In the first quarter, all three regions grew revenue in both U.S. dollars and local currency.

  • With the Americas and Asia-Pacific turning in double digit revenue growth in both U.S. dollars and local currency.

  • In the Americas, revenues grew 19% in U.S. dollars and 18% in local currency, with strong growth in both consulting and outsourcing.

  • While the biggest contribution in absolute dollar terms came from the United States, all countries in the regions delivered solid growth.

  • Revenue in our Europe, Middle East and Africa, or EMEA region, grew 5% in U.S. dollars and 7% in local currency.

  • Driven primarily by growth in France, Germany, Italy and Spain.

  • And revenues in Asia-Pacific increased 14% in U.S. dollars and 13% in local currency.

  • And at 303 million, set a new quarterly record.

  • New bookings were a great story again this quarter.

  • At 5.54 billion, new bookings were the highest in seven quarters.

  • We were pleased that consulting bookings increased 41% year-over-year, accounting for 2.78 billion of total new bookings for the quarter.

  • Outsourcing accounted for 2.76 billion of new bookings, a 34% year-over-year increase, and evidence that our BPO and applications outsourcing strategy are taking hold.

  • We're pleased with both the quality and the size of the contracts that were signed.

  • The 5.54 billion in new bookings is even more impressive because it was achieved without signing any mega contracts.

  • Our pipeline is also up sequentially and I feel very good about the quality of the opportunities we have in the pipeline.

  • We've seen some modest improvement in pricing, which allowed us to absorb the September 1 payroll increases and maintain our contract margins.

  • And we continue to drive for premium pricing in our consulting work.

  • Now, let me give you a quick update on three operational drivers that give us even more opportunity to improve our performance.

  • Managing our people, reducing SG&A, and leveraging our global delivery network.

  • Head count at the end of the first quarter was about 126,500 and we expect to end the year at more than 140,000 people.

  • Attrition was just under 19%, a slight uptick over the prior quarter, but in line with our target levels and below the attrition rate for the first quarter last year.

  • Utilization was 82%, making this the 11th consecutive quarter that we've had utilization above 80%.

  • We continue to focus on improving our cost structure and reducing SG&A costs as a percentage of net revenues.

  • On an option adjusted basis, we had 100 basis point improvement in the first quarter and continue to target 100 basis point improvement for the full fiscal year.

  • In the first quarter, we grew the global delivery network head count to 38,000 people.

  • We grew head count in India, the Philippines and China.

  • But had the strongest head count growth in our centers in Latin America and Eastern Europe.

  • We expect to be at 50,000 people in the global delivery network by the end of this fiscal year.

  • Overall, we're pleased with the progress we're making in key operational areas, as we continue to focus on operational excellence, expanding margins and driving profitable growth.

  • Now, let me turn it back over to Mike for some of our business outlook.

  • - CFO

  • Thanks, Steve.

  • Turning now to our business outlook.

  • For the second quarter, we expect revenues to be in the range of $4 to $4.15 billion.

  • This range assumes negative FX impact of 3% to 5% for the quarter.

  • We expect diluted EPS for the second quarter to be in the range of $0.33 to $0.35.

  • Now, looking at the full fiscal year, we continue to expect net revenue growth in the range of 9% to 12% in local currency.

  • Given the discounted share repurchases and redemptions in the first quarter, we've adjusted upward our expectations for our full year EPS by $0.07.

  • We now expect GAAP diluted earnings per share for fiscal year 2006 to be in the range of $1.52 to $1.57.

  • This range represents 19% to 23% growth over the comparable 2005 options adjusted baseline, which is as a reminder is $1.28.

  • Also for the full fiscal year, we continue to expect operating cash flow to be in the range of $2 to $2.2 billion.

  • Property and equipment additions to be $450 million, and free cash flow to be in the range of $1.55 to $1.75 billion.

  • We continue to expect our 2006 operating margin to be in the range of 12% to 12.5% for the full fiscal year.

  • This represents a year-over-year margin expansion of 40 to 90 basis points.

  • As a reminder this, is an annual target, so expect there to be some fluctuation from quarter to quarter.

  • We continue to expect the annual effective tax rate to be in the range of 35% to 38%.

  • And we are still targeting new bookings in the range of $19 to $21 billion for the year.

  • Let me turn it back to Bill.

  • - CEO, Chairman of Exec. Leadership Team

  • Thank you, Mike.

  • Before we open it up for questions, let me talk about the accelerated momentum that we're beginning to see and what we're doing to drive our performance to increasingly higher levels.

  • First, our global delivery network; at 38,000 people, we have the scale, maturity and a weapon for both offense and defense.

  • Our applications outsourcing strategy; we're adding sales directors, we're driving new sales campaigns and we have a streamlined contracting process.

  • Our BPO capability; we have a solid back bone and are winning in each area across the BPO functional spectrum, as well as in the rapidly growing multitower procurements.

  • Our quality and process excellence program is giving us additional leverage.

  • Our asset base strategy gives us new leverage by capturing our distinctive industry and functional knowledge for repeatability and reuse on a global basis.

  • Our new products and services are giving us powerful, distinctive new offerings to expand our core consulting business.

  • And finally, we are increasingly selective in the assignments we take.

  • All of this translates into higher sustainable levels of growth, earnings, and cash flow.

  • One of our objectives is to be a good investment for our internal and external shareholders.

  • We believe we are just starting to see the yield from the combination of our exceptional market position, our strategy, and the activity and momentum that is currently in the marketplace.

  • Now, let's take some questions.

  • - Managing Director IR

  • Okay.

  • Thanks, Bill.

  • We would like to give as many people as possible an opportunity to ask questions.

  • So just like last time, if you would, please, we would appreciate it if you could limit yourself to one question.

  • And then if you have additional follow-up items, you can circle back into the queue.

  • All right, operator, I think we're ready, please.

  • Operator

  • Thank you. [OPERATOR INSTRUCTIONS] We'll go to the line of Greg Gould with Goldman Sachs.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • I just wanted -- you guys are going to be surprised.

  • I won't ask about bookings and pipeline.

  • But I wanted to understand a little bit more; how much of this is economically driven versus -- and new tech cycle driven, the strength in bookings?

  • And it seems like the bias to bookings to that 19 to 21 billion target is to the upside, isn't it, given the strength in the first quarter?

  • And if the pipeline is up sequentially?

  • - COO

  • Greg, it's Steve Rohleder.

  • First, to your first question, yes, it's hard to segregate how much of this is driven by the cyclical nature of the economic trends out there.

  • I would tell you that the strength of the consulting bookings is really based on a couple of things.

  • First of all, technology refreshment that's happening in the ERP area, and continued push in high value consulting, primarily in the strategy area and in the human performance area.

  • So, you can kind of draw your own conclusions as to where that's coming from.

  • Outsourcing, I think that there's a continued push to -- for cost reduction.

  • I think that there's also a move toward the -- our vertical and horizontal BPO's and we're seeing a takeup in the marketplace around that.

  • - Analyst

  • Okay, and is the pipeline still composed mostly of small deals?

  • - COO

  • I would say yes.

  • Generally speaking, small to mid-size deals.

  • There aren't a significant number of mega deals out there.

  • There's a few.

  • But I would say your characterization is correct.

  • - Analyst

  • Okay.

  • Thank you.

  • Terrific quarter.

  • - COO

  • Thanks.

  • Operator

  • Thank you.

  • We'll go to the line of Rod Bourgeois with Sanford Bernstein.

  • Please go ahead.

  • - Analyst

  • Yes, guys.

  • I wanted to talk a little bit about the cash flow.

  • Your target is in the $1.7 billion range for the year.

  • And I wanted to see if you could give us some extra color on where the sort of uptick on your cash flow run rate will come from as the year progresses?

  • - CFO

  • Well, our cash flow has always been cyclical with respect to quarters.

  • The first quarter has been typically our lowest quarter, except over the last three quarters.

  • So basically, the pattern we're looking at this year is the same as the pattern in the out quarters.

  • That we continue to monitor the DSO thing and with the revenue run rate, the 1.55 to 1.75 was where we think we'll come out.

  • - Analyst

  • Okay.

  • That makes sense based on the history there.

  • Just a follow-up on that.

  • You mentioned that there was a payroll, or at least a salary increase, I assume is what that means, as the fiscal year began.

  • And that is sort of being offset by sort of pricing going up.

  • Can you give a little more color on how much the salary increase actually was?

  • And what the sort of net price increase is that you're actually seeing in the marketplace?

  • - CFO

  • Well, I'll give you a sense.

  • I think on the last earnings call, we had indicated, Rod, that from an overall standpoint, and you have to average this across a number of countries and a number of our work forces.

  • The average salary increase was about 6%, which was really about a 2% increase to our cost base.

  • And that kind of gives you a sense of what we've been able to recoup.

  • - Analyst

  • Okay, that's great.

  • The pricing, just to clarify, is the pricing power that you're seeing an apples-to-apples, or on like-for-like deals, or are you seeing like-for-like pricing going up and also a positive mix shift?

  • Can you break it down that way?

  • - CFO

  • Well, I wouldn't break it down that way.

  • I would tell you that there are specific areas of our practice that we're continuing to pursue a price premium.

  • For example, in specific areas of our business consulting practice and in those areas that we have specific assets that we can bring to bear to our clients.

  • That gives us the pricing power with very unique solutions, very, very strong skills that are in high demand.

  • That allows us to command a premium and we're going to continue to push that.

  • - CEO, Chairman of Exec. Leadership Team

  • Rod, this is Bill.

  • I would just add, as you know, we look very closely at the pricing of the new inbound work, and that's what's given us a lot of lift and optimism, frankly.

  • - Analyst

  • For instance, like in the offshore market, in the newer areas that you're getting into there?

  • - CEO, Chairman of Exec. Leadership Team

  • No, really across the board, in the traditional consulting business, in the complex SI business, which has a mix of offshore usually, and in the outsourcing.

  • I think the other thing I would point you to is the comment I made about the selectivity in being able to choose some of the work that you go after.

  • - Analyst

  • Great.

  • Thanks, guys.

  • Operator

  • Thank you.

  • We'll go to the line of Adam Frisch with UBS.

  • Please go ahead.

  • - Analyst

  • Thanks, guys.

  • You're coming off two very impressive quarters now and your outlook for Q2 is a little lighter than we expected.

  • But the year is the same, if not higher in most metrics.

  • Is there some seasonality here at play, or is the first shot at 2Q specifics just a conservative look?

  • - CFO

  • Well, Q2 is always a down quarter relative to the other three.

  • This year we have the vacation effect.

  • We have a significant FX head wind, we think coming at us.

  • It's a little bit hard to judge.

  • We have to make guess work there.

  • And basically, it's just a reflection of the seasonality of the business more so than anything else.

  • - Analyst

  • Okay.

  • And just a quick follow-up.

  • In the consulting bookings, obviously a very impressive number.

  • Anything, any big chunky stuff in there from outsourcing deals, or was it mostly things that are more traditional in nature, like your basic singles and doubles and there was just a lot of hits this quarter?

  • - COO

  • Adam, it's Steve.

  • More the latter.

  • It was singles and doubles that came in in big volumes.

  • - Analyst

  • Okay.

  • Okay.

  • Great job, guys.

  • - COO

  • Thanks.

  • Operator

  • Thank you.

  • We'll go to the line of Moshe Katri with SG Cowen.

  • Please go ahead.

  • - Analyst

  • Thanks, and great quarter.

  • Is there a way to quantify the bookings of what you guys called last quarter offshore-like services and think the number was about $200 million?

  • And then is there any way also to break down the booking growth by application outsourcing and BPO for the quarter?

  • Thanks.

  • - COO

  • Moshe, it's Steve.

  • We've not started to separate out our application outsourcing.

  • Bill has mentioned that we've got the initiative underway with the business development directors.

  • We're continuing to push the growth.

  • But quite frankly, we've not gotten that granular because it is mixed in with some of our other systems integration work.

  • We do see a higher demand for offshore usage and we see that across all five of our operating groups.

  • But to put a specific number on it would probably be incorrect right now.

  • - Analyst

  • Okay, but, again, you did specify a number last quarter.

  • I think you said $200 million in bookings.

  • - COO

  • I tell you why that was easy to do, because we had run a specific pilot in financial services that allowed us to isolate that number very effectively.

  • It's now grown, as we've scaled this program across all of our OG's and we haven't measured it individually.

  • - Analyst

  • Okay.

  • And then finally, is there a way to kind of get a feel on revenue growth in consulting in North America for the quarter?

  • - CFO

  • I don't have that with me and frankly, I don't -- I can tell you that, from an overall standpoint -- you heard me talk about the numbers.

  • The U.S. was in the high teens and frankly, that's what we've targeted.

  • We've targeted double digit growth for the year.

  • But I haven't broken it consulting and outsourcing.

  • - CEO, Chairman of Exec. Leadership Team

  • Yes, Moshe, this is Bill.

  • Steve has been -- had this grow America program under his watch.

  • And the thing is really starting to yield.

  • And we're just delighted with the progress that we see in the North America, particularly the United States.

  • And delighted with the pipeline we see there as well.

  • - Analyst

  • Great.

  • Thanks.

  • Operator

  • Thank you.

  • We'll go to the line of David Togut with Morgan Stanley.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • Mike, can you just elaborate on the biggest drivers of the SG&A improvement in the quarter and what you see for the balance of the year?

  • - CFO

  • Well, again, our objective for the year is 100 basis point improvement for the year, which we did for the quarter.

  • We've had a plan -- a program in place for the last few quarters to try and fundamentally disconnect the growth rate of SG&A from the growth rate in revenue.

  • That's comprised of some absolute cost take-out.

  • But more so, it's comprised of being able to leverage the same cost base across a higher revenue run rate.

  • An example would be the SAP system we put in last year.

  • We've now got that embedded and that allows to us do some things we couldn't do on the old model because we had to add people every time we seemed to add revenue.

  • We're moving more of our back office functions offshore.

  • That's still in its early days but that's beginning to take place.

  • And then thirdly, we're just have an overall push on the efficiency, if you will in, terms of how we operate the place.

  • So basically it's good old fashion management 101 in terms of how we're attacking it.

  • - Analyst

  • Okay, and, Steve, can you give us an operating update on NHS, how you're performing against key mile stones?

  • - COO

  • We're continuing the implementation per the schedule that we've laid out, David.

  • We're -- the contract is going well.

  • Other than that, I really don't want to make any comments.

  • As you can recall last time we talked about including the forecast for NHS in our guidance and there hasn't been any change from that.

  • - Analyst

  • Okay.

  • Thank you.

  • - CFO

  • You bet.

  • Operator

  • Thank you.

  • We'll go to the line of Andrew Steinerman with Bear Stearns.

  • Please go ahead.

  • - Analyst

  • Good afternoon, gentlemen.

  • I wanted a quick thought on your -- the last couple of quarters, this and last quarter, we've sort of skidded back to high single digit growth after a year of double digit growth.

  • And most recently, we've heard good things about the European economies for the first time.

  • How do you look at the strong bookings overall as it applies to Europe?

  • - COO

  • Let me start and Bill may want to add something in here.

  • Our business in Western Europe, as I commented on, Andrew, is very strong.

  • France, Germany, Italy all had double digit growth.

  • And we're continuing to see the strength there.

  • I believe we're taking market share in both consulting and outsourcing.

  • We are seeing the outsourcing market begin to pick up both from an application outsourcing, IT outsourcing, and BPO standpoint.

  • So, I think some of the trends that we've observed in the U.S. and North America have now spread into Western Europe and we're poised to take advantage of that.

  • So, I think we're seeing strong growth there and we're seeing a strong pipeline.

  • - CEO, Chairman of Exec. Leadership Team

  • Yes, I would just add Andrew, I spent a lot of time over there and I think, right now if you look at the Latin countries, which we've always been waiting for a slowdown, they continue to just do great.

  • Germany, as Steve mentioned, is doing fantastic and that's something that we're really pleased with.

  • The UK, which grew like a weed the last couple of years, is shaking itself out, absorbing a lot of the demand.

  • We're moving some people from country to country right now over Europe, which as you know, is sort of what we do routinely.

  • And yes we think that Europe will come back and be consistent with where it has been historically for us.

  • - Analyst

  • And did bookings look good in Europe?

  • - CEO, Chairman of Exec. Leadership Team

  • Yes.

  • No, bookings looked fine in Europe.

  • And the opportunity -- I think more importantly to me, Andrew, is the opportunities look great in Europe.

  • - Analyst

  • Thanks for the color.

  • Thank you.

  • Operator

  • We'll go to the line of George Price with Stifel Nicolaus.

  • Please go ahead.

  • - Analyst

  • Thanks very much.

  • Just to follow up on that last question, what was the growth in the UK?

  • You mentioned the four on the continent were all double digit.

  • What did the UK do?

  • - CFO

  • Well we don't look at the growth of the pieces per se other than casually, because it's not how we run the railroad.

  • For instance, we've had thousands of people shift into the UK over the past year.

  • And now some of those people we're moving back to cover the demand in Italy and Spain and those other places.

  • So -- but I think in the UK to be perfectly honest about it, we've been digesting a lot of the work that we had sold the last couple years and we're moving some people around.

  • The UK continues to be our third largest country in terms of people and our second largest country in terms of total business volume and activity.

  • - Analyst

  • Okay, and just a couple questions related to offshore.

  • First, what was India in the quarter?

  • I didn't hear if you gave a number in terms of people.

  • And how do you expect that to move through the year relative to your overall global delivery target?

  • And then what's the -- maybe a status update on where you're moving more of your back office functions to India?

  • Update on that, thanks.

  • - COO

  • Yes, the total in India for the quarter, I think we finished the quarter about 16,500, George.

  • And in terms of projections, we haven't split out, other than a total number, country by country within the global delivery network.

  • I would tell you in terms of our back office operations, it varies by function.

  • So for example, our HR function, we've moved some of our operations into India.

  • We're probably going to be moving some of our -- a little bit more operations to India.

  • In our finance function, we're actually moving some of that offshore to Brazil.

  • So it varies by country, and I'm -- Argentina, to be exact.

  • And I just wanted to -- I'm happy with the progress that we're making.

  • I think it's going to take multiple quarters to get us through this, so we've just scratched the surface, frankly.

  • - Analyst

  • Great, thank you.

  • Operator

  • Thank you.

  • We'll go to the line of Bryan Keane with Prudential.

  • Please go ahead.

  • - Analyst

  • Great start with the fiscal year.

  • Bill, you mentioned demand in pricing, that environment improving.

  • In particular, pricing, are you really starting to see some pricing leverage kind of going forward that you can actually price deals a little higher than you have, let's say, last fiscal year?

  • - CEO, Chairman of Exec. Leadership Team

  • Well, we're always very careful on this particular point and we've been staying stable for a long time.

  • And when we look at pricing, the first thing about pricing is to be able to absorb the payroll increases that we have every year.

  • And that has been important for us.

  • Now, what we're looking at -- and I think we mentioned this last quarter, that certain services that we have that we're trying to price on the more premium way.

  • Which is more related to the value we can deliver and we have seen success at that.

  • And then the third thing, which we look at, which is really important to Steve and I is we look at the inbound pricing on the new work.

  • And that's frankly, not boutique work.

  • That's very traditional work and it's in outsourcing, it's in systems integration and it's in consulting.

  • And we have seen that book of business that we signed in this quarter have improved pricing across the board -- across thousands of contracts frankly, than we've ever had before.

  • So we are feeling, I would say, Bryan, more optimistic about pricing than we have for a long, long time.

  • First step for us is maintain the margins, absorb the payroll increases.

  • And then the next step is being able to take some of that and bring it to the bottom line and that's what we're working on.

  • - Analyst

  • Okay.

  • And then on the offshore side, I want to ask that question a little differently.

  • At the analyst day, I think you guys were talking about taking an offensive attack towards offshore outsourcing and even competing head to head with some pure offshore deals against some of the tier one Indian firms.

  • Has Accenture had any success to report on this strategy of just going after the peer offshore pieces of business?

  • Yes, we sure have, Bryan.

  • - COO

  • In fact, there's a specific example in my home state that we went head to head with MphasiS, Wipro and TCS and beat them in a straight application outsourcing deal.

  • So we've seen examples now, not only in financial services, but in resources and our other operating groups, where we've gone head to head, we're price competitive, we're maintaining and expanding our margins with proposals that we're putting on the table and we're winning the work.

  • - Analyst

  • Okay.

  • That's great.

  • And then finally, Mike, option expense, it looked like it was $0.02 in the quarter.

  • I guess I was expecting more like $0.04.

  • Should $0.02 be the right number going forward per quarter?

  • - CFO

  • Well, we're reporting GAAP earnings for this fiscal year as the earnings fall.

  • And we're trying to restate last year to be able to give you an apples-to-apples comparison on what it would have been had we expensed options last year.

  • As we told, I think at the last time I spoke the because of this FAS 123R, we changed a lot of our old option based programs into our shoe-based programs and therefore there is no longer sort of an apples-to-apples real comparison of how much option expense might be in this fiscal year.

  • What I did say is that our total equity expense year-on-year is about the same.

  • - Analyst

  • Okay, great.

  • Thanks, guys.

  • Operator

  • Thank you.

  • We'll go to the line of Lou Miscioscia with Lehman Brothers.

  • Please go ahead.

  • - Analyst

  • Okay, thank you.

  • I was wondering if you could maybe go back and comment one more time about the U.S. and Europe?

  • Maybe from the respect of IT budgets in the sense of how much growth is actually Accenture actually getting from just IT budgets increasing on a year-over-year basis?

  • Maybe give us a projection if you could on the geographies for '06 and how much of it just sounds like just share gain?

  • - CEO, Chairman of Exec. Leadership Team

  • Lou, I don't -- I would sit here today, and it has never entered my mind about sort of increasing IT budgets.

  • And I mean a lot of this work, we've had in our pipeline for three months, six months, some of it 12 months probably.

  • A long time we've been working on these opportunities.

  • And I think that's important because we do see a lot more activity in the technology spending but it's a lot more recent than the opportunities that we have been pursuing today.

  • We are hopeful that that opportunity we see today in tech spending is going to serve us very well in the quarters to come and we hope to be well positioned to do that.

  • But I frankly, don't make the connection because I've -- Steve and I have both worked through the sales cycles on certainly many of the larger ones.

  • And these started way back before people started spending more money and before we got into the current budget cycles that we're in now with the companies.

  • As it relates to the geographies, in all honesty, you put your mind on something, you focus on something, you can profit improve it.

  • We did that with the United States.

  • We did that with the Americas.

  • We're seeing the yield the last several quarters.

  • Europe, on balance, it is a thriving component of Accenture.

  • It always has been and continues to be.

  • Europe's hard because you move people across all these countries.

  • And we run our business, as you know, through our five operating groups and not by country.

  • So, we tend not to look at it by country, but deploy those people where the demand is.

  • So, that's what's going on right now.

  • But in countries that have been super hot, like Italy and Spain, for years, they continue to grow at a double digit pace and dramatically ahead of the rest of the market.

  • I think broadly, we see the business activity in Europe to be very strong.

  • - Analyst

  • Okay.

  • Quick follow-up.

  • I guess when you look at such a nice booking number in the first quarter, would you expect it to be -- and obviously we always know it's choppy.

  • Would you expect it to be fairly linear throughout the year or would you expect that second quarter as per the comments earlier, about revenues and seasonality might dip down somewhat?

  • - COO

  • Well, I guess I would say that we sat there and you ask yourself -- we don't intend to change our bookings guidance.

  • That said, we feel great about the -- not only the bookings, but the, its components.

  • Right?

  • All the pieces that added up to the booking number.

  • And if you look at that and you look at our pipeline and you look at our win rate, you have to be pretty optimistic about the bookings going forward.

  • - Analyst

  • Okay.

  • Thank you.

  • Good luck on the year.

  • Operator

  • Thank you.

  • We'll go to the line of Brandt Sakakeeny with Deutsche Bank.

  • Go ahead.

  • - Analyst

  • Thanks.

  • Actually I'm all set.

  • Congratulations on the quarter.

  • - CEO, Chairman of Exec. Leadership Team

  • Thank you.

  • Operator

  • Thank you.

  • We'll move on to the line of Tien-tsin Huang with J.P. Morgan.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • Just a higher level question about the competitive landscape.

  • There's a lot of talk in the marketplace about possible levered buyouts of some of your competitors.

  • I was curious to know when you compete for contracts, how much of do your perspective clients weigh the supposed financial condition of the partner?

  • Like the level of leverage in an RP or a bake-off?

  • Just curious to know what your thoughts are there?

  • - CEO, Chairman of Exec. Leadership Team

  • Yes, well I would tell you there has always been a price -- well, for the leading companies, for the leading clients, for the big opportunities, there's always a price of admission.

  • And the price of admission, is you're credible, you're durable, and you're going to be around forever.

  • I mean if you can't pass that test, right, it's game over.

  • Because these people are betting their jobs and their companies on what you're going to do for them.

  • And there's no question about that.

  • Certainly down market and for certain components of work it's a little more helter skelter.

  • But I do believe that if you look at our client relationships, where our top 100 clients, 80% of those we've had relationships with for 15 years.

  • These people expect you to be there because what they are looking for is a business advisor, a business partner, someone who will share risk.

  • They are not looking for an opportunist who is going to cash out when it's -- when it works for them.

  • And so I think competitively, we pride ourselves on sort of who we are and where we came from and on what we do.

  • And we intend to stay the course on it because that's -- those are the kind of clients that hire Accenture for service.

  • - Analyst

  • Okay.

  • Just as a follow-up to that, can you remind us Mike, what you would view as the optimal capital structure for Accenture?

  • - CFO

  • I'm not sure I can do that justice on this call.

  • But basically, we have set some fence posts in the ground.

  • We've said that, we have a business that is run, we think, effectively, conservatively.

  • We've set a general guideline around our cash balance to be something in the range of 1.5 months worth of revenue.

  • We've set modest aspirations for M&A spend.

  • We have an SG&A -- excuse me, a CapEx that is this year in the range of $450 million.

  • We've committed to return cash to shareholders through both dividends and repurchases and indicated over time we would expect to see a shift toward dividends.

  • And we do not see ourselves taking on substantial leverage just for the sake of taking on substantial debt.

  • - Analyst

  • Okay.

  • So what's the latest thinking quickly in terms of share repurchases?

  • The last purchases were very shareholder friendly.

  • So curious to know if you have something similar in mind in the coming months or quarters?

  • - CFO

  • As of the beginning of the fiscal year we had $1.7 billion of share repurchase authority represent main.

  • I indicated that we intended, without specific plans, that we would probably use that authority over a period of 12 to 18 months and we are still on that track.

  • - Analyst

  • Very good.

  • Nice job guys.

  • Thanks.

  • Operator

  • Thank you.

  • We'll go to the line of Ed Caso with Wachovia Securities.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • I was curious how much Accenture benefits from the sort of current uptick in merger activity and working with clients, both new and old, to sort of help put these businesses together?

  • - CFO

  • We benefit a great deal from the merger activity.

  • As people know, if they followed our history, we have done many, if not all of the banking mergers through history.

  • We've worked on a great deal of what's going on in telecommunications right now.

  • We have a very distinct and specific part of our business, which is around post merger integration.

  • And we have a proven track record of being able to run clean rooms and operate.

  • And most importantly, accelerate the merger benefits dramatically ahead of what a company or other competitors can do.

  • And as you know how these mergers go together, it's all based on savings and an economic profile.

  • And what we have perfected through our consulting team is how to go in there and drive out the most amount of benefits in the shortest amount of time to have the best outcome.

  • And so we have any number of merger integration projects underway right now.

  • The interesting thing about those is they start out being very consulting intense.

  • But as time goes on and you start integrating the back offices in the systems and the processes and the call centers, they become very technology intense.

  • Right now in certain industries, we're doing the wave that is very consulting intense.

  • And I think downstream, it's a 10 or 20X kind of multiple in terms of the kind of work you can do to help these companies with the hard nuts, integration of the all the systems and processes and things they need to do to get right.

  • - Analyst

  • Can you just talk quickly about financial services, weak operating margin this quarter?

  • - COO

  • Yes, this is Steve.

  • First of all, I think it's important to just give you some context with financial services last year.

  • They are coming off a real strong year, so they had a tough comparable in terms of growth.

  • But that said, I would tell you that first of all, we've got a very strong pipeline of opportunities and strong bookings for financial services.

  • I think what we're doing is, we're experiencing a temporary lull in utilization that is going to correct itself in Q2 and Q3 going forward.

  • So, I don't see a systemic issue there.

  • - Analyst

  • Thank you.

  • Congratulations.

  • Operator

  • Thank you.

  • We'll go to the line of Pat Burton with Citigroup.

  • Please go ahead.

  • - Analyst

  • Hi.

  • Congratulations on the quarter.

  • - CEO, Chairman of Exec. Leadership Team

  • Thank you, Pat.

  • - Analyst

  • The strong bookings number, do you guys expect the consulting revenue growth rate to pick up as the year moves on?

  • - CEO, Chairman of Exec. Leadership Team

  • Yes, I mean I think what we're still targeting, Pat, is growth in the 9% range.

  • I suspect that if we see any change to that, we'll come back and obviously update our guidance.

  • But for right now, that's where we stand.

  • - Analyst

  • Thanks.

  • And as a follow-up for Mike, what is the weighted share number, Mike, in the February quarter?

  • Thanks.

  • - CFO

  • The weighted share number is 911 million, I believe.

  • It's something like that.

  • The 10-Q will be filed in a couple days and it will be there, as will the ending share cut on the cover.

  • - Managing Director IR

  • We can double check that for you, Pat.

  • - Analyst

  • But the shares will be less obviously in February than in the weighted November number?

  • - CFO

  • Yes.

  • The ending shares will be significantly less given we repurchased 52 million shares in the quarter, yes.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you.

  • We'll go to the line of Cindy Shaw with Moors & Cabot.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • Last quarter you mentioned on the call that you felt there was only one or more two quarters before some of the pricing power you've seen over the past year was fully reflected in the portfolio.

  • But your comments at the beginning of today's call suggest that there's actually a lot more room to run now from what you've seen over the last three months.

  • Can you comment on that for us?

  • - COO

  • Cindy, this is Steve Rohleder.

  • I think that certainly in this quarter, the pricing power that we experienced in Q4 and coming into Q1, on the new bookings that we had, was strong enough to cover our payroll costs.

  • And I think that's what you saw happen.

  • I'll just reiterate, I still think that we have opportunities to expand our pricing in our specific consulting areas and in the use of our -- the implementation of our asset strategy and we're going to continue to push that.

  • We're also getting more selective, as Bill mentioned, on the deals that we're going after to make sure that we can maintain and exceed our target margins for consulting and outsourcing.

  • So, we're aggressively looking to push premium pricing in the marketplace and we're going to continue to focus on it.

  • - Analyst

  • So it sounds like since it will take awhile for that for roll through the portfolio, we're going to see improvements there probably through the fiscal year, would that be fair?

  • - COO

  • I think it will be fair.

  • I think what you ought to focus on is the expansion that Mike mentioned in the operating margin.

  • At the end of the day, that's what we're trying to focus on, pulling the levers from G&A, increased pricing, increased utilization, lower costs to quality to contribute to the expansion at the operating margin level.

  • - Analyst

  • Right.

  • And then also, just talking to my industry contacts, it sounds like in somewhat lukewarm quarter for bookings Accenture pulled ahead of most of its competitors, if you could talk a little bit more about that.

  • - COO

  • Yes.

  • I think what we're seeing is industry acceptance of a couple of things.

  • First of all, the deep industry skills that we bring in our consulting practice, as well as a real resurgence of our outsourcing capabilities, specifically in the BPO and application outsourcing area.

  • I think there's an understanding that we have the right skills, that we're bringing into market and we deliver what we say we're going to deliver.

  • And that's contributed to our increase in win rates and to higher bookings numbers.

  • - Analyst

  • Can you talk about specific increases in win rates to put a number to it?

  • - COO

  • No, I would rather not.

  • - Analyst

  • Okay, great.

  • Thanks very much, and nice quarter.

  • Operator

  • Thank you.

  • We'll go to the line of Greg Smith with Merrill Lynch.

  • Please go ahead.

  • - Analyst

  • Yes, hi guys.

  • I think you said the overall attrition level is a little below 19%.

  • Just first question is what is the level you're targeting?

  • And is it possible to get the attrition just within the global delivery model versus the rest of the organization?

  • - CFO

  • I won't break it out individually, because we look at it in the aggregate.

  • I would tell you that traditionally, the first quarter has been a bit higher, just because we have people going back to school, going on to other jobs.

  • They have been given their annual bonus and they are moving on.

  • So, I was really happy to see the level that we're at.

  • And in terms of an overall target, we've taken a position that we obviously want to improve it.

  • We haven't set a specific target but we're striving to drive down that number quarter on quarter.

  • That's about all I would go forward with, Greg.

  • - Analyst

  • Okay.

  • And then one quick follow-up.

  • Just as you look at Western Europe, are you seeing any sweeping changes in the acceptance of an offshore delivery model throughout western Europe?

  • - CFO

  • Yes, the things that we are observing is that the offshore model there isn't necessarily -- and I'm talking specifically in the application outsourcing and BPO areas, isn't specifically to India, China, or the Philippines, but to Eastern Europe, Romania, Bratislava, some of the Eastern European countries that have a less of a language barrier.

  • So, we're seeing acceptance from an outsourcing standpoint in moving work to those areas, which has really fueled our growth in Eastern Europe.

  • - Analyst

  • Thanks a lot.

  • - Managing Director IR

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

  • Operator

  • Thank you.

  • And that will come from the line of Cynthia Houlton with RBC Capital Markets.

  • Please go ahead.

  • - Analyst

  • Hi.

  • Thanks for taking my question.

  • You talked about giving some numbers for billable heads in the low cost regions, both this quarter and for the year.

  • Could you help us segment out what percentage of those people are working on clients, Accenture clients, versus what percent are working on back office functions?

  • And then maybe splitting the other way, which are more in kind of the consulting group, versus what percentage of folks are in outsourcing?

  • - COO

  • Cynthia, this is Steve.

  • It's impossible to segment it out along the lines of what you have said.

  • The lion's share, obviously are focused on clients.

  • And to split it in systems integration, application outsourcing, or BPO's is a more difficult task.

  • The lion's share is a very high percentage of all of those people working in the offshore, global delivery network are focused on client work right now.

  • - Analyst

  • And is that also as you target the gross numbers, is that still going to be the case where the bulk of the growth is going to be for clients?

  • - COO

  • Yes, yes, it is.

  • - Analyst

  • And then just a quick follow-up.

  • You talked a lot about the strength in the BPO.

  • Could you -- a while back you were segmenting or giving a sense of what percentage of the outsourcing revenue.

  • Could you give us a feel for either growth or kind of how to think of the magnitude of that segment of the business?

  • - COO

  • Well, I won't quote specific percentages but I will tell you that we're continuing to see strength in the Accenture financial services area.

  • That is our fastest growing BPO unit.

  • Followed closely by AHRS and learning and Accenture procurement services.

  • Overall, our BPO revenue is up 25% for the quarter.

  • I would also tell you that in our verticals, our Navitaire and our customer contact or CCT vertical is doing very well.

  • So, those are two of the fastest growing verticals that we've got out there.

  • - Analyst

  • Thank you.

  • - CEO, Chairman of Exec. Leadership Team

  • Okay.

  • Well, thanks, everyone, for tuning in.

  • Our continued strong performance demonstrates, in my mind, our ability to deliver value to our clients and our shareholders consistently over time.

  • Our theme of high performance delivered, and our proven ability to help clients achieve high performance, are powerful differentiators for us in the marketplace.

  • We continue to develop and deliver solid top and bottom line growth, with double digit increases in both revenues and EPS in the quarter.

  • Our balance sheet remains strong and we are a cash generating machine.

  • Bookings were great.

  • Our pipelines expanded and we see a modest improvement in pricing.

  • The momentum in our business continues to build and I believe we're on a very solid trajectory here.

  • We very much appreciate your continued support and I want to remind you that Steve, Mike and I, as well as our broader leadership team, are available and happy to talk to you and if you would just please check in with Carol to make any arrangements, and she can help you.

  • Thank you, again, very much for joining us today.

  • Operator

  • Thank you.

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