埃森哲 (ACN) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Accenture third quarter fiscal year 2006 earnings conference call.

[OPERATOR INSTRUCTIONS] I'd also like to remind you, this conference is being recorded and replay information will be given at the conclusion of the call.

I'd now like to turn the call over to Carol Meyer, Managing Director of Investor Relations.

Please go ahead.

Thank you, Operator.

And thanks, everyone, for joining us today on our third quarter fiscal year 2006 earning 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.

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

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 detail, and Steve will add some operational perspective.

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

And Bill will close the presentation 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 the information presented on this conference call.

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

And you can find reconciliations of those measures to GAAP on the Investor Relations page of our website at Accenture.com.

So now let me turn the call over to Bill.

Thanks, Carol, and good afternoon, everyone.

Well, the third quarter was an outstanding one for Accenture.

We are very pleased with our operating performance in the quarter, which demonstrates the overall strength and momentum of our business, and supports our confidence in the balance of the year.

We continue to see strong demand, and we delivered solid results and gained market share.

Mike and Steve will amplify on these areas, but here is some highlights.

We had the highest quarterly revenues in our history with record revenues across all operating groups and geographic regions.

Consulting and outsourcing revenues were also our highest in any quarter.

We increased operating income, expanded operating margin, and reduced SG&A costs to 18.5% of net revenues.

We achieved 32% growth in adjusted EPS.

Our balance sheet is very strong, and we continue to produce exceptional cash flow, generating 746 million in free cash flow for the quarter.

New bookings, at 5.57 billion, were our highest in nine quarters, bringing total bookings for the first nine months of the year to 15.5 billion.

I would note that more than half of our new bookings are in consulting, which has tremendous momentum.

We continued to grow headcount, attrition remained within our target range, and utilization continues to be well above 80%.

These are important indicators of the underlying strength of our business.

At the same time, we remain focused on managing our work with the National Health Service in England.

Let me first say that our financial outlook on this work remains the same since we told you about this last quarter.

The two senior executives I put in charge of this matter are on site and dedicating themselves to the client engagement.

They are reporting directly to me, since I am personally overseeing our efforts.

I can tell you that they have already had a positive impact on reducing operating costs for the services portion of the contracts.

We are actively engaged with our client on positioning the program for success.

We remain committed to the program's goals as our first priority, and are working in that spirit day to day.

At the same time, we understand all of our options.

You should keep in mind that, as we've said before, this year the NHS contracts represent roughly 1% of our annual revenues.

I feel very good about our business.

We had a great quarter, and we're well-positioned for continued growth.

Now, let me pass it over to Mike, who will provide more detail on our third quarter financial performance.

Thanks, Bill, and good afternoon.

Q3 was a great quarter, with solid top- and bottom-line growth, excellent cash flow, and strong bookings.

Let me walk you through the income statement, balance sheet, and cash flow and provide some detail behind the numbers.

For the third quarter, net revenues were $4.1 billion, up 11% in local currency and 8% in U.S. dollars.

This is the highest quarterly revenues in our Company's history.

Breaking that down by type of work, consulting accounted for $2.66 billion, or 60% of total revenues, a year-over-year increase of 10% in local currency and 6% in U.S. dollars.

Outsourcing accounted for $1.75 billion, or 40% of total revenues, an increase of 14% in local currency and 11% in U.S. dollars.

As you know, last September we began expensing stock options and employee stock purchase plans.

Another item that sometimes affects our year-over-year comparisons is a reduction in reorganization liabilities, which were established in connection with Accenture's transition to corporate structure in 2001.

As I have done on previous calls, I will provide year-over-year comparisons using numbers adjusted for both options and reorganization liabilities.

This will give you an apples-to-apples comparison.

You can find reconciliations to GAAP figures in our news release, on the Investor Relations section of our website, and in the financial statements in the 10-Q that we intend to file tomorrow.

Now, let me take you through the rest of the income statement.

Gross margin was 33%, the same as the third quarter of last year on an options-adjusted basis.

SG&A costs were $816 million, or 18.5% of net revenues, an improvement of 130 basis points compared with options-adjusted SG&A costs of $808 million, or 19.8% of net revenues, for the third quarter of last year.

GAAP operating income was $690 million, or 15.7% of net revenues.

Excluding a $58 million reduction in reorganization liabilities, operating income was $632 million, or 14.3% of net revenues, compared with $533 million, or a 13.1%, in the third quarter of last year after adjusting for a $73 million reduction in reorganization liabilities and for options.

That's a 19% increase in operating income, and a 120 basis point expansion on operating margin.

As a point of information, we did accrue some annual bonus in the quarter.

As you can appreciate, we are pleased that our strong results allow us to incent and motivate the people who drive our business.

The effective tax rate for the third quarter of fiscal 2006 was 29.9%, compared with 29.4% for the same period last year.

The 29.9% effective tax rate for the third quarter of fiscal 2006 reflects the reduction in the year-to-date tax rate from 37% to 33.4%, primarily as a result of final determinations of reorganization liabilities and prior-year tax liabilities during the quarter.

As a point of comparison, had our annual tax rate been 35%, the low end of our previously communicated range, rather than 33.4%, EPS in the quarter would have been lower by $0.02.

GAAP diluted EPS for the third quarter were $0.56.

Diluted EPS, adjusted for our reorganization benefits was $0.50, an increase of 32% over the same period last year, after adjusting for reorganization benefits and options expense.

Now, let's turn to our cash flow and balance sheet.

Free cash flow in the third quarter was $746 million, resulting from operating cash flow of 806 million, less property and equipment additions of $60 million.

For the fist nine months of fiscal 2006, free cash flow was $1.65 billion, resulting from operating cash flow of $1.86 billion, less property and equipment additions of $209 million.

The improvement in free cash flow was due mainly to improved efficiency in billing and collections, as evidenced by DSOs and lower property and equipment additions than originally planned.

Our total cash balance at May 31st was $2.79 billion, compared with $2.48 billion at August 31.

Cash, combined with $324 million of fixed income securities, classified as investments on our balance sheet, was $3.21 billion, compared with $3.18 billion at August 31.

Total debt at May 31 was $50 million, compared with $75 million at August 31.

Our balance sheet metrics remain strong, and we continue to outperform our proxy peer group on these measures.

On an options-adjusted basis, our return on invested capital is 46%, our return on equity was 49%, and our return on assets was 14%.

Days services outstanding, or DSOs, in the third quarter were 43 days, 4 days better than the third quarter of last year.

During this fiscal year, we returned cash to shareholders through share repurchases and the declaration and payment of our first dividend.

In the third quarter, we repurchased or redeemed 9.8 million shares for a total of $290 million, bringing our total for the first nine months of year to 74.6 million shares for approximately $1.8 billion.

At May 31st, we had $2.2 billion of share repurchase authority remaining.

We continue to look at the balance between share repurchases and dividends.

We will be taking our recommendation for our next dividend to the Board and will update you on our Q4 call.

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

Thanks, Mike, and hello, everyone.

I'm going to comment on a few performance highlights of our operating groups and geographic regions, cover standard business metrics, and then I'll turn it back to Mike for a business outlook.

We're very pleased with the performance of our operating groups.

Each hit a new record for revenues this quarter, and after adjusting for reorganization benefits and options expense, three of the five operating groups turned in double-digit growth in operating income.

Here are a few highlights from our three largest operating groups.

In Communications & High Tech, we saw revenue growth in our electronics and high-tech industry group across all geographies and continued consulting growth in Asia-Pacific.

Products revenues were up considerably, with growth coming from health and life sciences as well as consumer goods and services.

The increase was also driven by revenues recognized in connection with the termination of a contract in our retail industry group.

And continuing trends in globalization and companies transforming their operating models have translated into strong demand for business consulting and transformational work and products.

Our Financial Services group saw growth in banking and insurance, and we continued to see strong demand in BPO and application outsourcing.

Our asset-based strategy continues to be a significant contributor to our business, and increasingly our revenues are linked to assets from our alliance partners or assets that we build our acquire.

For example, last week we announced our acquisition of a small company called Random Walk, which will help us expand our custom software integration and development capabilities for financial institutions.

All three of our geographic regions also delivered record quarterly revenues.

In the Americas, we're delighted that our business in the U.S. achieved double-digit growth, and we also saw good growth in Canada and Brazil.

Our Europe, Middle East, and Africa region, or EMEA, also saw growth, with the strongest results in Ireland, France, and Italy.

In Asia-Pacific, revenues grew 25% in local currency, primarily driven by our business in Japan, China, and South Korea.

Turning to new bookings, we had a great third quarter, with 5.57 billion in new bookings, our highest in nine quarters.

Consulting contributed 2.75 billion, and outsourcing contributed 2.82 billion, also our highest in nine quarters.

Our strong bookings for the third quarter bring our total new bookings for the first nine months of the year to nearly $15.5 billion, an increase of 20% over the same period last year.

This leaves us well positioned to achieve the high end of our full year target.

Consulting bookings for the first nine months were 8.1 billion, up 10% over last year, and outsourcing bookings were 7.4 billion, up an outstanding 33%.

In addition, our pipeline remains strong, and I'm pleased with both the quality and the economics of the opportunities we're seeing.

Now, turning to some of our other standard business metrics.

Pricing is stable, and we continue to make progress in improving SG&A.

Our workforce grew to 133,500 people, an increase of 16% over the third quarter last year.

We continue to recruit aggressively across all markets and in key locations around the world.

Attrition was 18% and is consistent with our seasonal trends.

Utilization was 85%.

And we continue to grow our Global Delivery Network, which now has 47,000 people, including 19,000 in India.

We're seeing real momentum in this area and we have opened four delivery centers in the past few months, including centers in Poland, Romania, India, and earlier this week in the U.S. where we announced a new center in San Antonio, Texas.

It's also important to point out that our Global Delivery Network continued to many of our wins in the quarter and continues to be a key competitive differentiator for us.

We're also investing in acquiring new capabilities for our business and have made a number of small acquisitions recently.

Two notable additions this quarter were Savista, a provider of HR and finance outsourcing solutions to the middle market; and Pecaso, a IT firm specializing in SAP, human capital management, consulting, and integration services.

All of these capabilities are being integrated into our operations and will go to market under the Accenture brand.

In summary, we have a portfolio of consulting and outsourcing business that is diverse from both a geographic and an industry standpoint.

At any given time, we have thousands of projects underway around the world.

Our portfolio approach gives us a balance and allows us to successfully manage through both economic market changes.

I'm extremely pleased with the progress we're making in our business and our strong results this quarter.

We had excellent bookings, achieved strong revenue growth, continued to reduce our cost structure, and are recruiting aggressively.

All in all, I feel great about the strength of our business and our position in the marketplace.

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

Thanks, Steve.

Let me make one correction.

I misspoke a number in my earlier remarks.

To correct -- for the third quarter, net revenues were $4.41 billion, not $4.1 billion.

Turning now to our business outlook.

For the fourth quarter, we expect net revenues to be in the range of 4.2 to $4.35 billion.

In June, we recorded a $140 million tax benefit as the result of the expiration of a statute of limitations, primarily related to the release of prior-year income tax reserves.

Given this, we now expect GAAP diluted EPS for the fourth quarter to be in the range of $0.52 to $0.54.

Looking at the full fiscal year, we expect net revenue growth to be at the upper end of our previously-announced range of 9 to 12% in local currency.

We now expect GAAP diluted EPS for the full year to be in the range of $1.55 to $1.57 including the June tax event.

Excluding the impact of the NHS provision and any reduction in reorganization liabilities, we continue to target operating margin for the full fiscal year in the range of 12 to 12.5%.

We are updating our outlook for operating cash flow, and now expect operating cash flow for the full fiscal year to be in the range of 2.1 to $2.2 billion, and property and equipment additions to be $350 million.

We are raising our outlook for free cash flow to the range of 1.75 to $1.85 billion.

This increase in our outlook is due to the reasons I cited earlier regarding effective balance sheet management and capital efficiency.

I am particularly pleased with our cash performance this year.

Including the impact of the Q4 tax benefit, we now expect our annual effective tax rate to be in the range of 25 to 27%.

We are still targeting new bookings in the range of 19 to $21 billion for the full fiscal year, however, given new bookings to date and pending opportunities, we now expect to be at the high end of the range.

Let me now make some comments about our preliminary thinking around fiscal year 2007.

As you know, our practice is to provide business outlook for the upcoming fiscal year on our Q4 call.

We intend to continue this practice, but I believe that it will be helpful at this point to give you some preliminary indication on what we see in general terms.

While we are still finalizing our plans, our current thinking for fiscal year 2007 is a continuation of revenue growth of 9 to 12% in local currency.

Our current thinking for EPS is in the range of $1.75 to $1.80.

Again, this is preliminary, and we will provide you with our formal outlook for these and other key financial metrics for the full fiscal year when we announce fourth quarter results.

I want to mention one additional item related to our business outlook.

Up to this point, it has been our practice to provide quarterly outlook for revenues and EPS.

We are currently evaluating whether to continue this practice.

As you know, many other companies have stopped providing quarterly guidance because they believe that it puts too much focus on the short term, at the expense of taking a longer-term view of their business.

In point of fact, our business operates on an annual cycle, and that's the way we manage it.

Our goal is to provide business outlook on a basis consistent with how we manage our business.

We'll let you know our final decision when we announce our fourth quarter results.

Before I turn it over to Bill, let me conclude by commenting on the overall financial strength of our business, which I believe positions us extremely well as we look to the future.

On a year-to-date basis, we have delivered bookings of over $15 billion, which is a 20% increase, net revenue growth of 12% in local currency, fueled by significant expansion in our consulting business, a 120-basis-point improvement in SG&A, and free cash flow in excess of $1.6 billion.

In my view, these results are unmatched in our industry and thoroughly speak to the broad-based strength in our business.

Now, over to Bill.

Thank you, Mike.

Before we open it up for questions, let me just summarize quickly.

I think the first point I'd make is we delivered really strong results and we feel good about it.

More importantly, maybe, we have great momentum in the business, and we continue to differentiate ourselves in the marketplace.

We have measures that show that we continue to put distance between us and our competitors.

And leading companies, both existing and new clients continue to reach out for us to help them achieve high performance.

So with that,Carol, let's take some questions.

All right, Operator, I think we're ready, please.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from the line of Adam Frisch with UBS.

Please go ahead.

Thanks, guys.

Could you provide a little bit more color on the tax rate here?

Because at first glance, and my math might be off because we were trying to get through a lot of your data here, but everything looks great in terms of revenue and margins and bookings and the outlook and all that kind of stuff, but the tax rate is making the EPS look a little less compelling.

Mike, am I right to assume that the difference between 35 and 37% in terms of your tax rate is the difference between you kind of coming in at consensus or beating by $0.02?

Well, our tax rate, or anybody's tax rate, for that matter is a rather complicated thing.

The annual effective tax rate -- and certainly what occurs in a quarter -- is the composite of the current quarter impact, plus the future -- potential future impact of your current earnings, plus what happens in the current quarter related to your prior earnings.

In this particular quarter -- we operate in about 50 countries, and we have something like 200 tax jurisdictions in which we pay taxes, so trying to forecast our tax rate is an art as much as it is a science.

Secondly, the FAS we pronounces -- pronouncements do not allow us to anticipate certain things when we give tax guidance.

Therefore, certain things, as it were, show up in the quarter that are not necessarily something we have been able to signal.

In this quarter, we had a slightly different mix of geographic income than we were thinking about, and we had some prior-year tax reserves that became released because final determinations were made in the quarter in several countries.

The point I made in my remarks was that that gave us a 33 -- the net of all that was a 33.4% annual tax rate for the year.

I compared that to the low end of our guidance of 35% to point out that, relative to the low end of our guidance, 2% of our -- $0.02 of our EPS came from a tax rate which was lower than the low end of our guidance.

Okay.

So next year we should assume somewhere back in that 35 to 37% range for taxes?

Well, I'm not going to comment on '07 beyond what I told you, but it won't be where I told you, I don't think, it won't be down at the bottom end of the range like we are now.

Okay.

Assuming you said everything about NHS that you're going to say, I wanted to kind of talk about the outsourcing portfolio for a second.

I think a lot of your individual contracts are getting a lot of attention these days, but could you comment on how the total portfolio is performing in terms of revenue growth and margin and how their tracking versus your internal expectation?

Yes, Adam, this is Steve.

I'm really pleased with the overall portfolio performance.

No question about it.

You see the bookings growth that we had this quarter, I think that underscores the strength that we've seen in the portfolio.

We have maturing contracts in there that are contributing above, frankly, what we had expected, and we have other contracts in there that are in early stages.

So we're balancing that out pretty effectively, I think, to deliver stable gross margins.

So I'm very happy with the performance.

I'm happy with the growth.

I think we've made some great strides throughout this year in the quality area, and we're going to continue to press that under Kevin Campbell's leadership.

Okay.

Thanks for that.

One question on iSOFT -- since your last update call, since the last quarter, iSOFT has obviously gone through some additional challenges and shakeups in management and so forth.

Can you just provide what your contingency plans are there if you cannot continue with them?

Yes, Adam.

This is Bill.

Yes, we're watching the iSOFT situation closely, as you might expect we would.

We have a series of alternatives that we can take forward, and we're prepared to go with those if that becomes necessary.

Okay.

Final question -- This is the big quarter in terms of buybacks where you annually -- you either in the past have done secondary offerings, now obviously you're buying back stock yourself.

Mike, could you give any kind of preliminary indication on how big of a buyback we can expect in the fourth quarter?

Well, I'm not going to commit to a number, but I would say that we have $2.2 billion of authority remaining.

I've indicated that that's the kind of thing that covers us for, sort of, a year and a half to two years.

So I think this year we've bought back $1.8 billion of that, sort of around 1 billion of that was the discounted tender offer and the follow-ons to that, and $800 million of it is what you'd know as normal course.

So I think if you quarterize the normal course, you'd at least be in the right time zone.

Okay.

Thank you, guys.

Your next question is from Rod Bourgeois with Bernstein.

Please go ahead.

Hey, guys.

I wanted to talk to you about the fiscal '07, sort of, early guidance that we're getting here.

Giving 9 to 12% revenue guidance at this early stage sounds pretty darn good while many are worried about the economy.

So, I guess, could you give us a perspective on what you're assuming about the economy as you give this fiscal '07 guidance?

And it might be nice to point out how much of the fiscal '07 revenues are already essentially booked to give you that confidence?

Can you give us that perspective?

Yes, this is Bill.

I mean, I would just give you a view.

I think, first of all, in a lot of ways, whether it's tech spending, the economy, or others, there isn't as close a connection as you might think between the things that drive our business.

The things that drive our business are competitiveness, management resolve to make investments, the merger and acquisition trend that you see out in the marketplace is a huge driver of opportunities for us.

So there are a series of things that are very important catalysts to what drive our business that aren't necessarily tied to the economy, interest rates, or some of the tech spending stuff that people write about.

Every year that goes by, we continue to have a bigger share of our business in the bag before we move into the next year.

This year is not an exception to that.

We're in the middle of our planning process right now, and we haven't wrestled that to the ground yet, but we feel good as we look forward.

As we look at our pipeline, the momentum in the business, and I guess, most importantly, the willingness of senior people in our client companies to make investments to compete, we think we're on a trajectory and we have a set of momentum that we expect to continue on from this year into '07.

So, Bill, I take it that when you look at your major clients' spending intentions and the discussions that you're having -- I know that when we look at the consulting market, we're not hearing any indication of a slowdown.

Are you hearing any signs of tentativeness at all in your major clients' spending intentions on the consulting side?

I think what's happened over the last several years is people have become more thoughtful, more deliberate, more diligent, and more results- and outcomes-oriented by the investments they make in services Accenture performs.

I think that has been good for our industry; it's been good for our customers.

And I think that same diligence is what we see today.

And I think that will continue.

All right.

And I want to turn to the -- on the pricing side, kind of on a related note.

Earlier in the fiscal year, you said pricing increase was enough to offset a 6% salary hike, which implied that your average price is up about 2% in the first quarter of your year.

Today, you're saying pricing is stable.

And I just want to make sure I understand the overall pricing pattern that's occurring.

Is this a case where price went up early in the year and has now -- is now turning sideways?

Or am I reading that correctly?

No, Rod.

I'd characterize it, I guess, as -- in Q1, we implemented the price increases to cover the payroll increases, right?

I would say from Q2 to Q3, we're seeing a level, stable level of pricing in our consulting work.

That said, I will tell you that in Q3 we also instituted selective pricing increases in our business consulting area, primarily around our strategy in supply chain areas.

And we're going to continue to push those into the marketplace.

But the prices that we're seeing and the stability is basically from Q2 to Q3.

Okay, great.

Thanks, guys.

Thank you.

Your next question is from Julio Quinteros with Goldman Sachs.

Please go ahead.

Hey, guys, good afternoon.

Real quickly, Mike, the guidance, the $1.55 to $1.57, that's a fully-loaded number, the way I understand it, including all of the impact of U.K.

NHS, all the impact of the reorg liabilities, and all the impact of the tax benefits.

If you strip all that noise out, what is the operating -- underlying operating level number you guys are looking at relative to the $1.55 to $1.57?

When we -- when I told you that we're looking at $1.75 to $1.80 as our EPS thinking in '07, we get there by basically answering the question you just asked.

So when we go --

No, I'm sorry, Mike.

I meant for fiscal '06, not for fiscal '07.

I'm just saying that what -- the number you're asking for, I'll give you our thinking.

I'm just saying we use that when we think about '07.

When we go through the maths around '06, we looked at a number that's in a range of $1.55 to $1.60 as being the comparable number.

$1.55 to $1.60 is the comp.

Okay, got it, perfect.

And, then, I guess, for Steve -- As we look at the margin improvement opportunities, I know that we talked about, in the past, operating efficiency efforts.

Can you give us an update on where we are with regards to operating efficiency efforts and what type of, sort of, opportunities still remain, either from the SG&A reduction side or any other initiatives that might help on the margin side?

Sure, Julio.

I'll start with the SG&A side.

I mean, you saw good progress in Q3.

I would tell you that the source of that is really in our geographic services area and in the efforts that we started in Q1 around moving our back office operations to a shared service environment.

That exercise continues.

It will continue through Q4 and into '07.

So we're seeing progress there.

I expect that we're going to see more.

I would also tell you that we've gone through a consolidated procurement approach to take our spend and centralize that.

And there's been savings associated with that on individual contracts and how we use contractors.

I would also tell you that there's room for us to get more efficient, frankly, in the S part of our SG&A.

From a sales standpoint, I think that we do have room for improvement.

Another area of upside I would point to is our cost equality.

We've made decent progress there.

I think we have more progress to make.

And to the extent that we're able to make progress there, you'll see an impact in both gross margin and operating margin.

And, then, the final area I'd point to is the continuing leverage of our Global Delivery Network.

As we move work into the network, the margins are accretive to our overall portfolio.

We've just got to continue to push work offshore into the Global Delivery Network, and we are focusing on that.

Great, Steve, and maybe if I can follow-up on the utilization and headcount additions.

All right.

Can you just -- I'm sorry?

Go ahead.

I'm sorry, I just wanted to ask about utilization and head count additions, again.

It sounded like the headcount adds for India was roughly, I think, roughly a 500 net adds versus last quarter.

Is the pace decelerating there?

Are you guys kind of at steady state?

Or what do you see going forward on that headcount -- ?

In fact, it's just the opposite.

Julio, I would tell you it's just the opposite.

In India, specifically, we've increased the number of recruiters that we have.

I mentioned the locations that we've now opened and we're beginning to staff as well.

So we're still aggressively recruiting and, frankly, able to attract the people that we want to attract into those centers.

And we're seeing that across the globe, in terms of all of our workforces.

From a utilization standpoint, I think we're at, kind of, the mid-80 mark, and, frankly, I would say that that's probably steady state for us.

Perfect, great.

Thank you.

And I think I just actually confirmed.

The number for India last quarter was 17,500, that I have.

So you're saying about 19,000 currently?

Right.

Okay.

Got it, okay.

Perfect.

Thank you.

Sure.

Your next question will come from Moshe Katri with Cowen & Company.

Please go ahead.

Hey, thanks.

Thanks, a lot.

And, by the way, congratulations on very strong consulting bookings.

Can you talk a bit about your European business?

EMEA was up 7% in local currency, 0% in U.S. dollars.

And I think, historically, you've mentioned, I think, the U.K. was pretty strong, and you haven't mentioned the U.K. today during your presentation.

Maybe it's related to NHS, maybe not.

But is there a pattern of a slowdown in Europe at this point?

Are we seeing any change in some of the trends that -- in terms of demand?

Moshe, it's Steve.

Let me start there.

I think the U.K., we've seen ups and downs in our business there, and I characterize it as stable, obviously, setting aside the impact of NHS.

If you move over to continental Europe and look across the operating groups, I would pick France and Italy as the high spots in a number of the operating groups, where we're seeing good growth, in both consulting and outsourcing.

I would tell you that we're also seeing the BPO trend really taking hold in continental Europe, which is driving growth in our Global Delivery Network locations in Eastern Europe.

So there is some related growth in the Global Delivery Network as it relates to the BPO trend.

Germany is pretty stable.

I was just in South Africa a couple weeks ago, and these guys have some great growth plans on the table for next year.

But I would tell you, overall, I think continental Europe, I would point to France and Italy as being the high spots for growth, with Germany being pretty stable and Spain kind of in a stable-to-decreasing mode right now.

And then the government side, I think you've had three sequential quarters now with roughly about $600 million in revenues.

Maybe you can kind of elaborate on that?

Again, maybe it's NHS.

And you haven't really said much about the Texas welfare program, maybe we can get an update on that?

Thanks.

Yes, I'll just comment on the Texas job real quickly.

We're continuing to execute the integrated eligibility job with the client.

We've got a great relationship with the client.

We've continued our pilot activities.

They have been extended, as you would with any pilot activity, to make sure that we're taking the experience that we have and working it into the results.

You may have seen the Maximus announcement this week.

We did amend and conclude the amendment of our subcontract with Maximus to reduce the scope of their responsibilities and shift work to Accenture.

And I would also tell you that their statement has no positive or negative material impact on our financials.

So that's kind of a quick update.

As it relates to government overall, I would point to pockets of the business that are going very strong.

The U.S.

Federal business, specifically in defense, is still very strong.

I would also tell you that we're being selective in other parts of the world, in terms of work that we're going after because the government has adopted a very stern terms-and-conditions approach that is very difficult for us to do business with.

So there are pockets there where we've stepped away from work and will continue to step away from work so we don't introduce undo risk into the portfolio.

Asia-Pacific, specifically in Japan and Australia, are still growing at a steady rate.

I would also point out that France is, in terms of continental Europe, is a good growth area.

Italy, on a much smaller base for our government group.

So, hopefully, that gives you some color.

Sure.

And, then, in that respect, just a final question regarding government.

I think Accenture has been involved in the DHS Eagle contract.

Are we going to see an announcement shortly in terms of your involvement there, or just confirming that?

Yes, you will.

All right, thanks.

Next we have Andrew Steinerman with Bear, Stearns.

Please go ahead.

Hi.

Question for Mike -- On fourth quarter gross margin, since so much of the industry is on vacation, typically, I think gross margins are down sequentially about 200 basis points if you look at the historical trend of Accenture.

Do you think this quarter will be any different than typical seasonal gross margin trend sequentially from the third to the fourth?

We don't give guidance around gross margin, but I don't know of any macro trends that would take it one way or the other.

Okay.

Thank you, very much.

We have Bryan Keane with Prudential.

Please go ahead.

Yes, hi.

Good afternoon.

I just wanted to get Accenture's thoughts on the U.K.

NHS NAO that came out a little over a week ago.

Any surprises, either positive or negative, that you guys read in that report?

Well, this is Bill.

I guess, I don't think there were surprises in it.

It generated a lot less heat and light than it might have, and I think that's a good thing for the program.

All the sort of political stuff that comes with these hard government things creates distractions for getting the job done.

So I think it's important to have that past.

It's important to have the hearing associated with that past.

And it's important to let people get to work on driving out the results.

I mean, it seems like the relationship, just even over the last month or so seems to be getting a little bit better because I haven't seen as many quotes in the papers as I did maybe a few months ago.

Would you say that the relationship with Accenture and the U.K.

NHS is getting a little bit stronger, or is that reading too much into it?

Well, I guess I would say that our -- we have the same goals, right?

Which is to get it done and to make something important happen.

And we recognize the complexities and the challenges of it.

And I think at this point, we're very committed to working together to achieve the outcome that we set out to do.

Okay.

And, then, Mike, just on the guidance, the preliminary guidance you gave, I assume that does -- there's some operating leverage improvement that we've seen in fiscal year '06, you'll still see some more of that in fiscal year '07?

Or is that more flattish margins?

I'm not going to get into margins.

I know you guys are trying to deal with your models and I have sympathy for that, but we are what we are.

I tried to give you our revenue ramp rate as we see it, growth rate.

And I tried to give you the end point on where our EPS will come out.

We haven't got all the puts and takes finalized in terms of our planning process, and we'll be back next quarter and fill in the gaps for you.

Right.

I guess I was just trying to confirm it, because Steve was naming a lot of operating levers there, I would be surprised if it didn't continue.

That's all I had, thanks.

Okay, thanks.

Next we have George Price with Stifel Nicolaus.

Please go ahead.

Thanks, very much, and congratulations on a nice quarter.

Also, congratulations on, I believe, I saw that you were selected as one of the winners for Eagle, I think that came out today.

Question -- One thing I wanted to follow up on was the federal side, just in terms of what kind of impact you're seeing -- you noted a particular strength in defense -- but what kind of impact are you seeing from some of the budget concerns on that side?

And, then, also, maybe if we could get an update on VISIT, how that's progressing?

There was a, I believe, a GAO report out recently that might have been a little critical on VISIT thus far.

Yes, let me -- this is Steve, George.

Let me start with US-VISIT.

Just to remind everyone on the call, the US-VISIT contract is a task-order-based contract.

In other words, the client puts together tasks in conjunction with the work that they want us to do.

We arrange that work and we complete that work on an ongoing basis.

So it's a very low-risk contract, in that it's not one of these huge, fixed price, fixed scope kinds of deals.

That said, I think we're performing very well on the contract.

I've seen the reports, and I can tell you that, in talking to our team, and in, frankly, and talking to the program manager at DHS for US-VISIT, they're very pleased with our work there.

So I would just leave it at that, frankly.

As far as the overall U.S. federal picture, as the budgetary process unfolds and we understand where the budgets are landing, obviously, we're watching the DHS budgets, we're watching the defense budgets, we're watching the treasury budgets, because those are our major clients in the U.S. federal market space.

To date, we haven't been concerned about any budgetary let up in terms of spending in those anchor clients of ours in the U.S. federal space.

And we continue to chase work at new agencies as well.

Okay.

And, Mike, if I could ask you, just on the basis of your preliminary revenue commentary on fiscal '07, I realize that the acquisitions you've done are pretty small, but then again, we have seen about, I guess, I think four of them in the last quarter or so.

We also have a couple of contracts that are shutting down -- Sainsbury and [Centure Cook].

What are kind of the puts and takes of all those things in terms of impact next year?

Well, we are not going to get into the business of letting out the M&A revenues ,for the simple reason that when we take these things out and they really become either enhancers or starter kits for areas of our business, and we meld them into pieces of our business and run them as a piece of the whole and then report them back to the OGs.

But having said that, as Steve commented, we are pleased with the progress we're making in M&A.

I think our so-called tactical tuck-in strategy is working, and we take that as a positive and look -- and that will have a positive bump on next year's revenue.

These other things you mentioned, yes, but what you have to kind of remember in our business is that we have people on these assignments.

And assignments wind down, some for natural reasons and some for other reasons, but our job and the job of our sales force, if you will, is to redeploy the people into new clients and generate new revenue.

So it's -- the fact something shuts down, it has that headline, but it also frees up resources to go work somewhere else.

So it's not a black and white thing in terms of how you think about that from a revenue impact.

The numbers I gave you are a view that this is a business that, as we've told you for the last couple years, we believe is on a trajectory, in the 9 to 12% local currency.

We've tried to get out of the FX forecasting business, and basically say this is a business that we can grow in the high single digits in consulting and in the mid to high teens in outsourcing for the medium term, and that's how we get to the 9 to 12%.

Okay.

And, then, last thing, if I could.

I just -- I wonder if maybe you could give some more color on how your expansion on the global delivery front has helped some of your new business wins?

Maybe anything in particular you can cite?

And maybe give us an update on the progress of selling those smaller, offshore specific deals, maybe something like win rates versus recent head-to-head competition with the pure plays.

Well, I'm not going to quote win rates and get into all the details, but I will tell you that the opening of the centers that I talked about in Poland and Romania were a direct result of demand that we are seeing in Western Europe.

There's an educated labor force there.

There's language support for multilingual capabilities that support both our HR outsourcing business and our finance outsourcing business.

So the growth in Eastern Europe is being driven primarily by the growth in BPO in continental Europe.

I would also tell you that South America is becoming an emerging support, not only for Spain and Portugal, but also for North America.

And when I commented on Accenture moving a lot of its shared services offshore, we've actually moved our operations, a number of our operations, down to Brazil into one of the centers down there.

So the growth around the world is fueled in different pockets by different trends.

I would tell you that the guys that run our Global Delivery Network are very cognizant of the price and cost inflation in certain markets and are ready, willing, and able to move to other emerging areas very quickly using the model that we have.

And I think, frankly, that's the strength that differentiates us.

And we saw that, just to answer your question in terms of specifics, in the Unilever win that we had with a multi-country approach in terms of servicing their outsourcing operations.

And with some of the progress on the -- selling the smaller offshore specific deals, if you can maybe give us additional detail on that?

I know, previously, you've thrown out some figures in terms of TCV or number of deals that you've won.

Yes, I would tell you that in this account, I'd have to go back and look specifically.

It's about a half dozen deals, less than $100 million.

And I would tell you, just in general, though, we still are seeing the size of the overall deals, the smaller deals, coming into the pipeline.

We're not seeing the large mega deals.

We do see multi-tower deals with the big companies coming in, but, frankly, more and more of them are small, 50 to 100 to $200 million outsourcing deals that focus on a specific horizontal or vertical BPO operation in a specific country.

And we've seen that trend now for two or three quarters.

Great.

Thank you.

Your next question is from Tien-tsin Huang with JPMorgan.

Please go ahead.

Thanks, it's Tien-tsin.

Just a follow-up question on some of the acquisitions you've done.

How do they perform versus planned in terms of growth and attrition?

Any surprises there?

Well, as I commented earlier, it's early days, really, in terms of this so-called tactical tuck-in strategy.

We've done a handful or so, and they're all, basically on course with our thinking.

And our broad strategy is to bring them in, meld them into our overall business, use them as either enhancers or starter kits, depending on where they fit in our portfolio of go-to-market activities.

We report them back to the OGs in terms of how they affect our business results.

It's early days, but the strategy seems to be working.

Right.

But what's the appetite now for acquisitions, both large and small?

Well, our strategy continues to be in the tactical tuck-in area.

We've said that we're looking, on an aggregate basis this year, for something, I think we said somewhere in the order of magnitude of $300 million was our appetite this year for M&A.

That would probably grow some next year, but not humongous.

And we have no strategy to take on large M&A activities.

We can't predict what's going to happen in this industry, but it's certainly not a piece of our strategy.

Great, thank you.

Thank you.

We'll now go to Alan Hellawell with Lehman Brothers.

Yes.

Thank you, very much.

Curious,I was hoping you could discuss in a little more detail your BPO activities.

Any significant shift in mix of activities within BPO?

Just general margin comparison to the corporate average?

And, then, what kind of major expectations do you have over the next year in that area?

Allan, it's Steve.

Let me start with breaking the discussion into both horizontal BPO and then vertical BPO, and I'll try to give you some color around the operating groups.

First of all, from a horizontal standpoint, we are still seeing strong demand in both Accenture Financial Services and Accenture HR Services, primarily in financial services and products.

But there are opportunities in all of our operating groups across the board in those two areas.

So the demand, both from an operating group standpoint and a geographic standpoint, is very strong in those two horizontals.

That said, one of the most unique offerings we have right now that seems to be increasing in demand is our Accenture Learning horizontal, as well as an emerging growth -- the emerging growth of Accenture Procurement Services.

So both of those, while new, seem to be getting some very strong traction in the marketplace.

From a vertical standpoint, we've got a good story around the airlines in our Navitaire offering.

We are still early stage in terms of our Customer Contact offering, as well as our Accenture Government Services offering.

So those are still emerging.

But we've got about three or four ideas and new businesses in the vertical space.

The growth there is a little bit slower than what we'd like, but it's more than offset by the growth in the horizontal space.

Great.

And, obviously, without extracting unnecessary detail, what -- how do you compare this to the rest of your business, whether it's margins or you've touched on growth, but how do I think about it going forward as a piece of your business?

This is Bill.

Let me speak to that a little because I think this has been an important year for us in BPO on many dimensions.

And a lot of it is due to Kevin Campbell rejoining the firm, coming in here with an absolutely frightening focus on profitability, on industrialization, on quality.

Because in BPO, you make your own profit.

I mean, they just don't come and do that automatically.

And I think the thing that we have done this year with some important people that we've brought into the firm and Kevin's leadership, is drive the profitability of our existing portfolio up and position to have a frighteningly profitable portfolio as we go forward.

And that's all about industrialization, the factory nature of how you operate BPO things, and as you get to certain elements of scale.

And I think in many of the areas Steve talked about, particularly Finance and HR, we have reached an element of scale.

We have industrialized, we have the process disciplines into place to be able to add new work for very low cost and have it be an important differentiator in our economics.

Now it's taken us a few years to get there, but I would say BPO is taking its place consistent with our other two growth platforms in terms of its role in Accenture, in terms of how we see it playing in the future, and in terms of how much gas we have on the pedal in terms of driving it into the marketplace.

And our plans are to continue to drive that way, to take profitable business, but most importantly, to be able to execute with quality, predictability, and precision.

And I -- we have actually taken our Board through this in a great deal of detail at our last Board meeting, because they asked the same question you have.

And they're delighted to see the progress we've made and where we see BPO sit when you get to the net line and the contribution that it can make to the future of Accenture.

Judging by the frequency of the word profitability, it sound's like you're on the hole.

Pretty impressed with the direction.

The last question I would have is -- The portability of consulting into the GDN, one of our thesis is it actually -- it might be a little more -- the back end parts of consulting, you might be able to slip into the lower-cost areas.

Are we over emphasizing that?

Or can you just -- any illustrative examples of what you have been able to achieve in bringing that offshore?

No, I think you have that right.

I think as we look at our portfolio across our Business Consulting business, we see opportunities to get more and more leverage out of our Global Delivery Network.

We have not -- we see opportunities to build new products and services, things that we might not move something we have today, but we would use it as a place to create the next generation of products and services.

Tim Breene, who runs our Business Consulting operation is all over that.

He, in fact, is in China and India over these two weeks doing exactly what you have put forward.

And we see it being an important part of our ability to differentiate and compete.

And so we would share your view on that.

Oh, good, so we're not radically off base.

Thanks a lot, gentleman.

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

Okay, that will come from Pat Burton with Citigroup.

Please go ahead.

Hi.

Thank you, and congratulations on the quarter.

The question is for Mike.

And that is -- What is the share count, Mike, you're using in the '07 range that you provided us?

Well, that is not a number I have at my fingertips.

And you can see what the dilutive share count is for the calculation this quarter.

It would be somewhat down from that, but I don't have it at my fingertips.

Okay, thank you.

Let me just make -- wrap up here for a minute, if you'd stick with me.

The first thing I'd like to just mention is, I think we've talked about a story about growth.

We've talked about a story that's about momentum.

We've talked about a balance trajectory of our business across our three growth platforms.

And we've talked about underlying resilience of the business.

And every year that portfolio of business, the portfolio of clients continues to get better.

And we believe we're on a trajectory that really matters.

I think Mike put some stakes in the ground on '07.

In '07 we feel very good about this trajectory as an important thing, momentum is an important thing, and we feel great about the prospects for '07.

I would say, we're operating in a market that we're very fortunate that we are probably the most attractive employer in our market space.

We have a core competency to be able to recruit and train and deploy people, and we're in a marketplace that deep, differentiated skills matter.

And if we had 2, 3, 4,000 people with certain skills today, we could put them to work in 48 hours.

And, so, our ability to do that, I think, is very high.

Steve leads that with all our offshore agenda, and I spend a lot of time on that on our onshore agenda.

So, we feel good about the trajectory and where we're going as we look to the future.

I do want to take a minute, as many of you already know, this is Carol Meyer's last earnings call with us, in as she will be retiring from Accenture at the end of the fiscal year, on August 31st.

Carol has been head of our IR team since we went public in 2001, helping guide us through an important period in Accenture's history.

All told, Carol leaves us with a distinguished 28-year career at Accenture.

She's made a lasting and positive impact in every role she's had here over the years, and it has been my personal, great pleasure to be able to work with her.

Succeeding Carol as Head of Investor Relations will be [Richard Clark], currently Managing Director for Finance in our Communications & High Tech operating group.

Richard's a CPA with significant financial experience and operational experience.

He's held executive positions around Accenture in a number of business areas for more than 20 years.

Richard has already begun working closely with Carol and the rest of our Investor Relations team to ensure a smooth transition.

Having personally worked closely with Richard for 16 years, I know that he will continue the strong tradition of leadership in Investor Relations that Carol has brought to the role over the past five years.

In closing, we had a terrific third quarter.

Thank you for your help and support.

We're delighted to be able to deliver strong results.

And thank you for joining us today.

Thank you, Operator.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 9:45 p.m. tonight, through midnight Thursday, July 13th.

You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 833247.

International callers dial 320-365-3844 using the same access code -- 833247.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.