埃森哲 (ACN) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Accenture's first quarter fiscal year 2007 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host, Mr. Richard Clark, Managing Director of Investor Relations. Please go ahead.

Thank you, operator. And thanks everyone for joining us today on our first quarter fiscal year 2007 earnings announcement. As the operator just mentioned, I'm Richard Clark, Managing Director of Investor Relations. With me this afternoon are Bill Green, our Chairman and Chief Executive Officer; Pam Craig, our Chief Financial Officer; and Steve Rohleder, our Chief Operating Officer.

We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Bill will begin with an overview of our results. Pam will take you through the financial details including the income statement and balance sheet, and Steve will add some operational perspective. Pam will then provide our business outlook for the second quarter and for the full fiscal year 2007. Bill will close the presentation before we take questions.

As a reminder, when we discuss revenues today during our call, we're 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 SEC filings.

Accenture assumes no obligation 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, Richard. Good afternoon, everyone, and thank you for joining us today. As you have seen, we have had an outstanding quarter. We're off to a terrific start to our new fiscal year and we are absolutely delighted with the growing momentum in our business. Pam and Steve will provide the details on their perspective areas in a moment, but here are some highlights.

First, we achieved the highest revenues of any quarter in our history with record revenues in each of our operating groups and geographic regions. Consulting and outsourcing revenues were each at their highest in any quarter with double-digit increases in both types of work.

Next, we significantly increased operating income, we expanded operating margin 50 basis points, and we operated with SG&A costs at 17.2% of net revenues. We grew EPS by 28%. Our balance sheet continues to be very strong. And importantly for the future, new bookings were $5.5 billion and included a record high $3 billion in consulting, demonstrating the tremendous momentum we continue to see in this part of our business.

At the same time, we continue to grow headcount, attrition remained stable and utilization in the first quarter was our highest ever, well above 80%. Our first quarter results are further evidence of the strength of Accenture's business, our broad-based growth, our business leverage, and our confidence in fiscal 2007 and its outlook.

With that, let me pass it over to Pam who will provide more detail on our financial performance in the quarter.

Thank you, Bill. Happy holidays to you all and thanks for listening today. I am pleased to tell you more about our outstanding results in the first quarter of fiscal 2007. Our quarterly revenues hit a record, our earnings were strong, and our bookings were in line with our outlook. In short, the fundamentals and momentum in our business continue to be very robust.

Let me take you through some detail behind the numbers in our income statement balance sheet in cash flow. Net revenues for the first quarter were $4.75 billion, an all-time quarterly record. Net revenues increased 14% in U.S. dollars and 11% in local currency over the first quarter of last year. Our net revenues in the first quarter exceeded our previous outlook by approximately $100 million, primarily due to higher demand for consulting services and a higher-than-expected foreign exchange lift.

Consulting revenues were a record $2.91 billion, an increase of 13% in U.S. dollars and 10% in local currency. Outsourcing revenues were $1.84 billion, an increase of 16% in U.S. dollars and 13% in local currency.

Moving down the income statement, gross margin was 30.1% compared to 31.7% for the same period last year. SG&A costs for the first quarter were $817 million or 17.2% of net revenues compared with $802 million or 19.2% of net revenues for the first quarter last year. GAAP operating income for the quarter was $610 million reflecting 12.8% operating margin. This compares to $513 million or 12.3% operating margin in the same period last year for an increase of 50 basis points.

There are several key factors that are reflected here. First, we did a very good job covering our salary increases that went into effect at the beginning of the fiscal year with corresponding price increases.

Second, given stronger than expected demand, our utilization was higher than planned, which was then partially reflected in lower payroll and SG&A.

Third, the strong results also allowed us to accrue a substantial amount of annual bonus. As a reminder, we run our business day-to-day to operating income and operating margin expanded by 50 basis points year-over-year. Our effective tax rate for the first quarter was 36.7%. GAAP income before minority interest for the quarter was $406 million compared with $328 million for the first quarter last year, an increase of 24%. GAAP diluted EPS were $0.46, an increase of 28% over GAAP diluted EPS of $0.36 in the first quarter last year.

Now, let's turn to some key parts of our cash flow and balance sheet. Free cash flow for the quarter was $99 million resulting from operating cash flow of $166 million less property and equipment additions of $67 million. Our day services outstanding or DSOs were 40 days. This represented a decrease of seven days from the first quarter last year.

Our total cash balance at November 30 was $2.44 billion compared with $3.07 billion at August 31. Cash combined with $407 million of fixed-income securities classified as investments on our balance sheet was $2.84 billion at November 30 compared with $3.53 billion at August 31. Total debt at November 30 was $32 million compared with $52 million at August 31.

Our balance sheet metrics remained strong. For the first quarter, our return on invested capital was 64%. Our return on equity was 71%, and our return on assets was 17%.

Before I turn things over to Steve, I will comment on share repurchases and dividend activity. In the first quarter, we repurchased or redeemed 24.4 million shares for a total of approximately $724 million. This included the repurchase or redemption of 9.5 million shares at a discount and the repurchase or redemption of 14.9 million other shares at the market.

The average price of shares repurchased and redeemed in the quarter was $29.62 a share. As of November 30, we had $1.4 billion dollars of share repurchase authority remaining. Also, last month, we paid our second annual cash dividend to Accenture Limited Class A and Accenture SCA Class 1 common shareholders. The dividend payment of $0.35 per share was $0.05 more than the dividend we paid last year.

From time to time, we get questions about the size of our public float. Using what we believe to be the most conservative method of calculation, our public float at the end of the quarter was approximately 61%, which excludes all founder shares.

All and all, it was a great quarter any way you look at it, and we're extremely proud of our results. Now Steve will give you some more detail on our operations.

Thank you, Pam. Let me just take a few minutes to provide some insight into our operational highlights along the three dimensions of our business. Our operating groups, growth platforms, and geographies. I will also touch on several key operational metrics important to understanding our strong business performance this quarter.

First, we're delighted that three out of our five operating groups -- financial services, products, and resources -- delivered outstanding double-digit revenue growth. For the third consecutive quarter, our financial services team delivered strong results with revenue growth of 25% in U.S. dollars and 21% in local currency. Financial services also reached $1 billion in revenue for the first time and delivered a solid bottom-line. We saw strength globally in our banking and insurance industries, with business consulting in high demand, especially in CRM and postmerger integration. Financial services is also seeing strong demand for systems integration and BPO dominates the outsourcing space with solid activity in procurement, human resources, finance and accounting, and learning.

The products operating group delivered revenue growth of 17% in U.S. dollars and 14% in local currency. We see strong demand for consulting, primarily in ERP, global supply chain and CRM. Human resources and procurement BPO were key to our outsourcing growth in products, and it's also worth noting that products led the five operating groups in bottom-line profitability.

Resources also delivered revenue growth of 17% in U.S. dollars and 14% in local currency with both energy and utilities making strong contributions to our growth in Q1. I also want to point out that globally, seven of our top 10 countries delivered double-digit growth in local currency.

Moving to our growth platforms, in business consulting we're seeing very strong growth in two areas. First, a large number of companies across all industries and geographies are pursuing enterprisewide transformation programs, which is driving significant demand for business consulting.

Second, globalization is also driving demand as major multinational organizations look to enter new markets and get closer to their customers. In systems integration and technology, we saw significant activity this quarter as our global delivery network continued its steady pace of growth. With strong demand for our global delivery capabilities, we increased the headcount of our global delivery network by 11%, reaching 53,300 people at the end of Q1, including 23,600 in India. In total, we now have more than 25,500 people in India and we recently opened an Accenture Technology lab in Bangalore.

Finally, we're delighted to have been recognized as the worldwide leader in systems integration services by a top industry analyst. Solid demand in outsourcing continues and we're pleased with the deals we're seeing in the market. We see significant activity in BPO, especially in the multi-tower space where our offerings clearly differentiate us from our competitors. Application outsourcing continues to be very active and we're seeing a big growth opportunity in the deals in the $50 million to $100 million range.

In government, revenues grew 5% in U.S. dollars and 4% in local currency driven by strong consulting revenue. Operating income decreased due to an asset write-down associated with an outsourcing contract, and in Communications & High Tech, revenue growth of 5% in U.S. dollars and 2% in local currency represents the highest U.S. dollar growth in the past four quarters. However, operating income was affected by an increase in sales costs driven by a strong pipeline of opportunities.

Before we leave the operating groups, let me comment briefly on the transition of the NHS contracts. Things are proceeding according to the plan with the final transition date in early January. We continue to expect the contract losses in connection with the transition and wind-down will be consistent with what we told you last quarter, with most of the losses being recorded in the second quarter.

In terms of our geographies, I'm pleased that all three geographic regions achieved record high quarterly revenues. Asia-Pacific led the way with 19% revenue growth in both U.S. dollars and local currency driven by strong results in both Japan and Australia. The Americas grew by 13% in U.S. dollars and 12% in local currency led by the U.S., Canada, and Brazil. This represents a very strong year-over-year increase of $235 million in net revenue.

Our Europe, Middle East, and Africa, or EMEA region, also turned in strong results delivering growth of 15% in U.S. dollars and 9% in local currency; it's highest local currency growth in the last six quarters. We continue to pursue a proactive growth program with special emphasis on the UK market.

Before closing, let me touch on a few key operational metrics that are important to understand our business. With respect to pricing, the actions we've taken allowed us to fully absorb our compensation increases. We also see the opportunity to improve pricing in business consulting and technology consulting, as well as some evidence of upward price movement in certain areas of the systems integration space.

Turning quickly to our people, at the end of Q1, we had approximately 146,000 employees, an increase of 15% over Q1 last year, and we continue to recruit aggressively. Attrition was approximately 19% which is consistent with the first quarter last year. Utilization was approximately 86%, which represents the 15th consecutive quarter of utilization at or above 80%. I'll just say again how pleased I am with our strong topline growth and bottom-line profitability.

And now, let me turn it back to Pam for our business outlook.

Thank you, Steve. As a reminder, each quarter we provide an update on our annual outlook for the full fiscal year. We also provide outlook for the next quarter for revenues but not for earnings per share. For the second quarter, we expect revenues to be in the range [of] $4.6 billion to $4.8 billion.

Now let's turn to the full fiscal year. We continue to target new bookings in the range of $22 to $24 billion. We continue to expect our revenue growth to be in the range of 9% to 12% in local currency. Given our strong performance in the first quarter and our projections for the rest of the year, we have increased our outlook for EPS for the year by $0.03 to a range of $1.80 to $1.85.

We continue to expect operating margin for the full year to be in the range of 12.6% to 13.1%. Given the seasonality of our business, you should continue to expect some fluctuations quarter to quarter.

Related to cash flow, we continue to expect operating cash flow to be in the range of $1.95 billion to $2.15 billion; property and equipment additions to be $335 million; and free cash flow to be in the range of $1.6 billion to $1.8 billion. To complete the annual outlook for fiscal 2007, we continue to expect our annual effective tax rate to be in the range of 34% to 37%.

In summary, our first quarter results reflect those of a healthy, robust business with clearly demonstrated momentum for continued growth and profitability. We have a portfolio that is broad-based, across industries, across the different types of work we do, and across all the geographies where we do business. We remain confident that we will continue to maintain and expand our strengths in the markets we serve.

So here is Bill to close before we take your questions.

Thank you, Pam, and before we open it up for questions, let me just summarize quickly. We delivered exceptionally strong results in the first quarter, demonstrating both growth and leverage. We continue to see strong demand for all of our services, with particular momentum in consulting where we have been able to build capabilities that are truly second to none.

One of the keys to differentiation is specialization. Across the board, we have the scale, the breadth, the depth to specialize and to further differentiate ourselves in the marketplace.

And lastly, another key to differentiation is superior execution and our global delivery network truly continues to set us apart. Our first quarter results illustrate how we continue to build on our unique leadership position.

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

(OPERATOR INSTRUCTIONS). Adam Frisch, UBS.

Nice quarter, guys, and Pam, if my math is correct, you're one for one, so don't let Bill take all the credit here. On the gross --

Thanks, Adam.

On the gross margin line, Pam, lower than we were expecting, but the operating margin is slightly higher. I want to get a feel for how you are mapping the numbers. Your cogs are up, I'm assuming, because you took more of the annual accrual in the quarter, kind of like take it while you can, while the quarter was good, but you are running the Company for the operating line to show that year-over-year improvement. Is that the right way to think about this?

That's the right way to think about it, Adam, and it is hard to understand at first. We've analyzed this fully and I will just go through it again in a little more detail.

Cost of services is largely payroll, so the first thing that we looked at in gross margin was to make sure that we fully absorbed our salary increases that went into effect on September 1. And we did this very well, so at a raw level, gross margin was very good.

The next thing to think about here is utilization. As you heard, our utilization was very high and thus we saw higher payroll in cost of services and lower payroll in SG&A. And then, as you mentioned, strong results also allowed us to accrue a good amount of annual bonus and the annual bonus follows payroll when it's booked, so it substantially went to cost of services. So, as you said, day-to-day we drive the business to operating income at the bottom-line and we did [at] the expansion in operating margin.

I don't think people will have a problem with that given the upside in EPS and the buybacks in the dividend. So, good explanation there. Turning to revenue for a minute, our second half revenue growth was greater than the first half largely because you had much easier comps in the second half, but the strong first quarter and strong outlook for the second quarter offers two possibilities about the back half. One, there is going to be a falloff, which is kind of hard to believe because of the booking strengths, or two, you're being conservative. So being kind of new in your seat, which one should we take there?

Well, I think one thing that you should think about here, Adam, is FX. Because FX is coming in higher than we had projected and so that is having an impact next quarter in terms of the guidance that we are giving for revenues. The consulting demand is also very strong right now. So that's also reflected in there.

How much do you think FX added in the quarter?

This past quarter?

In terms of percentage of the gross?

About 3% for the quarter that we just had.

That was what versus budget?

It was probably a point or more above what we had. We had about (multiple speakers) [two, I guess].

So, net it added a point, basically.

Yes, at least. Maybe a point and a half.

I think that's it. Nice quarter.

Julio Quinteros, Goldman Sachs.

Real quickly on the -- actually, Steve, can you just go back through the comment about the asset write-down in the garment service? I just went back through the old transcripts and hadn't seen that before. I just wanted to make sure I understood what that was all about.

Yes, we're not going to disclose the specific client or anything. I can tell you that, Julio, on a quarterly basis, we review each one of the long-term assets on each one of our contracts to ensure that we've got -- we can recover their value, and if we need to we take a write-down, but we're not going to disclose the individual account. That's exactly what happened this quarter.

So that was just -- I just wanted to confirm that it was a new disclosure, though.

Yes.

Got it. And then for Bill, had we been looking at the consumer -- sorry, the CEO confidence data that had come out recently by one of the firms that publishes that information. I just wanted to correlate that back to your sort of view about the demand environment and how things are going in your discussions as we go into 2007. There's a lot of puts and takes about expectations for the consulting demand environment and clearly it sounds like you guys have a good tone, but I just wanted to kind of get your feel as it relates to CEO confidence in the beginning of the year.

Yes, I think, you know I spent two days at the business roundtable, so for the U.S. component of our business, people are pretty bullish. I think it's interesting that CEOs have learned to deal with an environment that's a little more uncertain than they were used to dealing with in the past. So as we have changes in certain government statistics, changes in interest rates, changes in energy prices and all that, people have learned to sort of roll with the punches and recognize that they've got to invest in their business for the long haul. I think when we look at the activity in the market and we look at the pipeline and when I, frankly, meet with dozens of CEOs of our clients and prospects, people feel good about their businesses, and they believe they need to invest in order to compete for the long haul. So I still feel good about everything we see outside.

And then just finally, just as a follow-on to that, Bill, the relevance of large deals, can you just sort of walk us through the thinking on that? Because clearly we sort of get caught up on the fact that there aren't as many large deals as there used to be, but this isn't showing up in your numbers. You guys are still kind of knocking the cover off the ball. Can you just kind of just make sure we understand what the relevance of that is? It doesn't seem like it's much at this point.

No, it isn't. I think we've moved along as a business. It used to be that people all stood around waiting to see if the large deal was going to close, when it was going to close and tracked its life expectancy from birth to death. I think importantly, now, is there's a lot of -- there's a lot more stability in the market because all those midsized and smaller deals just give you a lot more durability, a lot more stability, and when you do get the big deals, they sort of come on top of your existing book of business. So we've got our company right now sort of engineered to operate on a growth trajectory that includes the portfolio of business that's out there, and from time to time, one of these large ones will come along and it will only sweeten the pot, frankly.

Thanks, guys. Thanks for the stocking stuffer here.

Rod Bourgeois, Bernstein.

Listen, the gross margin dropped 1.6 percentage points year-over-year. Clearly the bonus was a piece of that and I'm assuming the contract write-down might have been a piece of that. Is there a way to dimension what portion of the 1.6 came from bonus versus contract write-down versus something else?

As I mentioned, what we look at is in terms of our raw gross margin, which is before you get to bonus. That was actually very good, and so it is largely bonus.

And then the SG&A was huge savings there -- 200 basis points year-over-year. Is there any lumpiness to that improvement or is that sort of a run rate that can be sustained? I assume that that's going to be a tough run rate of year-over-year improvement to sustain, so can you talk about how that SG&A savings might play out over the course of the year?

Yes, that was clearly better than we had targeted. As you know, we've been on a journey to reduce SG&A year-on-year for several years now. That run rate is better than we were targeting for this year, so I think that your point about lumpiness can be expected.

And then the consulting bookings growth, you had a tough comparison but you still did 8% year-over-year growth. Looks pretty impressive. Can you talk about where the consulting bookings stream came from? Is it pretty balanced across business consulting versus systems integration or was there a certain spot within consulting that was particularly strong?

I think it's focused in the systems integration area but with healthy growth in business consulting as well, and if you looked at it geographically, I would say that we had a heavier focus in EMEA than in the U.S. or Asia-Pacific. Still strong in Asia-Pacific -- excuse me, in the Americas, but EMEA really carried a lot of the growth there. If you looked at the OG breakdown, you'd look at resources and financial services both bringing on some real strong consulting growth, primarily in systems integration with some business consulting. So --

And then one other question. You mentioned the salary increase has been given and that you're offsetting that essentially with price increase. Last year you kind of indicated that the price increase exactly offset the salary increase. Can you give the numbers? Was it a 6% salary increase this year consistent with last year? Is there -- can you quantify that a little bit?

In '07, our average compensation increase was about 8% and that translated into a rough average compensation cost increase of 3% to 4%, so it was slightly up over '06.

So what that means is that pricing is up around maybe 3% to offset that?

At least 3% to 4%.

Andrew Steinerman, Bear Stearns.

When talking about the NHS transition costs, which I think we said was $125 million over two quarters and I caught the majority being in the second quarter. Which line do we find those NHS charges in? Is that a Cost of Goods Sold? And how much of that was absorbed in the quarter?

Yes, Andrew, it is in Cost of Services, and I won't give an amount for what was in the quarter, but you can expect that the bulk of the $125 million will fall in the second quarter.

And the same comment about the payment, which I think it was a cash payment of $120 million -- is that next quarter or was that already this quarter?

That's scheduled for next quarter.

Got it. And share count, given the amount of share count redeemed or bought back, I'm surprised share count didn't come back more, but I know there's a lot of puts and takes to that. Just based on what you already disclosed, what would be a good share count going forward?

It will come down slightly this year.

Tien-tsin Huang, J.P. Morgan.

Nice quarter. I had a follow-up question on the share count -- actually, on share repurchases in general. Given the undersubscribed tender, how are you thinking about share repurchases? Is there a greater appetite for open market repurchases or maybe another tender?

Well, I think all of the options are open to us at this point. We're going to be continuing with our normal repurchases from senior executives and we'll also be considering what to do with possible further discounted transactions as well as the open market.

So stay tuned for that. And then on, I guess on free cash flow, which was quite healthy this quarter, you kept your guidance on free cash flow the same despite raising your EPS forecast. What's driving the delta there?

Well, we looked at it, of course, and although we see a slight uptick in cash flow, we were still within the range that we'd guided to, so we stuck to it.

And then lastly, Steve, on the global delivery network, how is this performing versus plan and can you give us some sense of revenue growth out of the global delivery network?

Well, we don't breakout the revenue growth specifically for the GDN, but I will tell you that we are -- even in the first quarter, we're well in advance of our recruiting plans and, in fact, we've increased our overall target for growth for the year because of demand. And not only in India, but in the Philippines, Eastern Europe, and in South American. So --.

Great. Thank you. Nice job. Happy holidays.

Thanks. Operator, we'll take one more question.

Bryan Keane, Prudential.

Just a couple clarifications. First, Pam, the 24.4 million shares repurchased, I guess, help me out to understand why that doesn't go down more. What are the puts that make it kind of stay more stable?

You mean for the year?

Or just for the quarter.

Give me a second here. We were -- our fully diluted at the end of the quarter was 875, right?

Yes.

And we had 881 at the end of Q4, that's what you're looking at?

Right. So you know, the 24 million, I guess, unless you purchased them all at the end of the quarter, I would assume that -- I know the number doesn't go all the way down, but I'm just trying to understand, make sure I understand why it doesn't go down.

Because most of these repurchases were later in the quarter, so as you know, when you do that waiting, it doesn't necessarily then impact Q1 as much as it will Q2.

So Q2 will see a substantial drop in share count?

You will see a drop.

And then on the SG&A, obviously that number was lower than a lot of us expected. I guess, what exactly is going on there and why isn't that -- why aren't you able to carry that forward in the future quarters?

Well, I think that there's some good G&A [efficiency] in there and we're very pleased with that. I think when it comes to the payroll, given that utilization was so high, there was less payroll in SG&A than we expected, and so that's why we think there will be some lumpiness in the SG&A going forward. We are obviously expecting it to come down, that's what we plan to do year-on-year, but it did come in lower this quarter than we expected.

I would just add to Pam's points, in the G&A point we're spot-on. On the sales piece, I can see us having increasing sales costs moving into the next two quarters specifically to drive the bookings numbers. So that's why I think Pam is saying what she's saying in terms of the lumpiness of that.

And then just finally, Steve, the big asset -- the asset write-down in government, did you disclose how big that was? And then secondly, does that linger on as we go forward into the quarters? Or is it kind of a one and done type of thing?

No, we didn't disclose the amount and no, there's no lingering amount.

Okay, so it's -- we won't have a recurring issue with that contract?

Correct.

No.

Well, thanks a lot and congratulations on a great quarter.

Let me just wrap up here in a quick closing. I just want to say a couple of things. First of all, we are obviously very pleased with our performance in the quarter. It's a terrific way to start and kickoff the new fiscal year and we're moving into the rest of the year with a great deal of confidence.

We remain intensely focused on our growth agenda, capitalizing on opportunities for growth and capturing market share in the major geographies around the world. We are fortunate to have the world's most successful enterprises as our clients. Helping them achieve high performance and providing them with huge value for money allows us to grow a predictable, a durable, and a profitable business.

And lastly, we are even more fortunate to have the best people in the business who are responsible for producing these results. So thank you very much for joining us today and thanks for your continued support of Accenture.

Ladies and gentlemen, this conference will be available for replay after 9:45 PM today through January 3 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 852452. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 852452. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.