埃森哲 (ACN) 2017 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to Accenture's second-quarter FY17 earnings call.

  • (Operator Instructions)

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

  • I would now like to turn the conference over to Managing Director - Head of Investor Relations, Angie Park.

  • Please go ahead.

  • Angie Park - Managing Director & Head of IR

  • Thank you, Shannon, and thanks, everyone, for joining us today on our second-quarter FY17 earnings announcement.

  • As Shannon just mentioned, I'm Angie Park, Managing Director - Head of Investor Relations.

  • With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial 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.

  • Pierre will begin with an overview of our results.

  • David will take you through the financial details, including the income statement and balance sheet for the second quarter.

  • Pierre will then provide a brief update on our market positioning before David provides our business outlook for the third quarter and full FY17.

  • We'll then take your questions before Pierre provides a wrap-up at the end of the call.

  • 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'll discuss on the call, including our business outlook, are forward-looking and as such are subject to known and unknown risks and uncertainties, including but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly report on Form 10-Q and other SEC filings.

  • These risks and uncertainties could cause actual results to differ materially from those expressed on this call.

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

  • We include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the investor relations section of our website at accenture.com.

  • As always, Accenture assumes no obligation to update the information presented on this conference call.

  • Now let me turn the call over to Pierre.

  • Pierre Nanterme - Chairman & CEO

  • Thank you, Angie, and thanks, everyone, for joining us today.

  • We are very pleased with our financial results for the second quarter and first half of FY17.

  • For the quarter, we again delivered broad-based revenue growth across many dimensions of our business and we continue to gain significant market share.

  • We see excellent demand for our services, especially in high-growth areas such as digital, cloud and security related.

  • Our very strong bookings confirm both the relevance and success of our strategy to update our business to The New and our support our confidence as we look ahead to the rest of the fiscal year.

  • Here are a few highlights for the second quarter and year to date.

  • We delivered very strong new bookings of $9.2 billion for the quarter, and $17.5 billion for the first half.

  • We grew revenue 6% in local currency for the quarter and 7% year to date with continued strong growth across many areas of our business.

  • We delivered earnings per share of $1.33 which brings EPS for the first half of the year to $2.91, an 11% increase on an adjusted basis.

  • Operating margin was 7.7% for the quarter and 14.7% for the six months, an expansion of 20 basis points year to date.

  • We generated free cash flow of $50 million for the quarter and $1 billion year to date.

  • And we continue to return a substantial amount of cash to shareholders through share repurchases and dividends, including more than $2 billion year to date.

  • Today we announced a semi-annual cash dividend of $1.21 per share which will bring total dividend payments for the year to $2.42 per share, a 10% increase over last year.

  • So, with the first half of the year behind us, I feel very good about our business.

  • We see very strong demand in the marketplace for our differentiated capabilities and remain confident in our ability to deliver our business outlook for the year.

  • Now let me hand over to David who will review the numbers in greater details.

  • David, over to you.

  • David Rowland - CFO

  • Thanks, Pierre, and thanks to all of you for joining us on today's call.

  • Overall we delivered strong results in the second quarter which were aligned with our expectations and position us very well to achieve our full-year financial guidance.

  • We continue to see favorable market conditions in most areas of our business, especially as it relates to strong demand for digital, cloud and security-related services which plays to our strength as a leader in innovating and leading in The New.

  • Our second-quarter year-to-date results demonstrate our ability to continue to deliver on the essential elements of our formula for driving superior shareholder value.

  • So before I get into the details, let me summarize some of the major headlines.

  • Net revenue growth in local currency of 6% in the second quarter and 7% year to date continues to significantly outpace the market, driven by double-digit growth in all three components of The New, including digital, cloud and security-related services.

  • Growth continues to be broad-based, with positive growth in the vast majority of our industries and geographic markets, more than offsetting cyclical market pressures that continue in a few concentrated areas of our business, specifically energy, chemicals and national resources and communications and media.

  • Absent those concentrated areas of pressure, the majority of our business grew 9% on a quarter-to-date basis and 10% on a year-to-date basis.

  • Operating margin of 13.7% in the quarter came in as expected and consistent with last year.

  • Operating margin of 14.7% for the first half of the year represents 20 basis points of expansion.

  • These results continue to reflect significant levels of investment in our business and our people to further enhance our differentiation and competitiveness in the marketplace.

  • And on a year-to-date basis we delivered 11% growth in earnings per share over FY16 adjusted EPS.

  • Our free cash flow of $50 million in the quarter and over $1 billion year to date puts us on a trajectory to deliver on our annual guidance which reflects free cash flow in excess of net income.

  • And importantly, we continue to execute against our strategic capital allocation objectives, first by investing over $800 million across 16 transactions in the first half of the year; and second, by returning roughly $2.2 billion to shareholders via dividends and share repurchases.

  • So as Pierre said, we are pleased with our overall results so far this year.

  • And we're encouraged by the trends we see in the market and the potential for even stronger growth and momentum in the second half of the year.

  • With that said, let's get into the details of the quarter, starting with new bookings.

  • New bookings were $9.2 billion for the quarter.

  • Consulting bookings were $4.6 billion with a book to bill of 1.1.

  • And outsourcing bookings were $4.6 billion with a book to bill of 1.2.

  • We were very pleased with our bookings which landed in the range we expected and represents the third-highest level of new bookings over the past 10 quarters.

  • From a business dimension perspective, we were pleased with our bookings in both strategy and consulting services combined and application services.

  • And as you would expect, digital, cloud and security-related services continue to be an important theme in the work we contracted with our clients.

  • Looking forward, we began the third quarter with a healthy pipeline.

  • And we believe we're positioned for continued strong bookings in the second half of the year.

  • Turning now to revenues.

  • Net revenues for the quarter were $8.32 billion, a 5% increase in USD, 6% in local currency, reflecting a foreign exchange headwind of approximately 2%, consistent with the guidance provided last quarter.

  • Our consulting revenues for the quarter were $4.4 billion, up 3% in USD and 5% in local currency.

  • And our outsourcing revenues were $3.9 billion, up 7% in USD, and 8% in local currency.

  • Looking at the trends in estimated revenue growth across our five business dimensions, growth was led by operations which posted double-digit growth for the fifth consecutive quarter.

  • Application services delivered mid single-digit growth, and strategy and consulting services combined grew low single-digits.

  • Once again the dominant driver of our growth was continued strong double-digit growth in The New, with all three components growing double-digits as well.

  • Taking a closer look at our operating groups.

  • Products, our largest operating group, led with 15% growth, reflecting continued strong momentum in the business.

  • Growth continued to be broad-based, with strong growth across all geographies and industries.

  • Financial Services grew 8% in the quarter, driven by double-digit growth in banking and capital markets globally and overall in both Europe and the growth markets.

  • As expected, banking and capital markets in North America returned to positive growth this quarter.

  • H&PS came in as expected at 2% growth, with positive growth in both health and public service globally and strong overall growth in both Europe and the growth markets.

  • Overall growth in North America was flat.

  • We expect H&PS to deliver stronger growth in the second half of the year and to deliver full-year growth in the mid single-digit range, consistent with the comments I made in September.

  • Communications, Media & Technology grew 1%, reflecting solid positive growth in North America and double-digit growth in the growth markets, partially offset by continued contraction in Europe.

  • From an industry perspective, CMT was led by significant double-digit growth in software and platforms with positive growth in electronics and high-tech.

  • However, communications and media contracted on an overall basis, primarily driven by our business in Europe.

  • We expect that revenue growth in our European communications and media business will continue to be challenged for the rest of the year.

  • Finally, Resources revenues decreased 1% in the quarter which is in the range we expected and the story line remains the same.

  • We continue to see strong growth in utilities which is more than offset by challenges in both energy and chemicals and natural resources, especially in North America.

  • We expect our Resources group to continue to navigate a challenging environment but to deliver positive growth in the second half of the year.

  • Moving down the income statement, gross margin for the quarter was 30.1% compared to 29.8% in the same period last year.

  • Sales and marketing expense for the quarter was 10.5%, consistent with the same quarter last year.

  • General and administrative expense was 5.9% compared to 5.7% for the same quarter last year.

  • Operating income was $1.1 billion in the second quarter, reflecting a 13.7% operating margin, consistent with quarter two last year.

  • As a reminder, in the second quarter of last year we closed our Navitaire transaction which lowered our quarter-two tax rate by 1.7% and increased net income by $495 million and diluted earnings per share by $0.74.

  • The following comparisons exclude this impact and reflect adjusted results.

  • Our effective tax rate for the quarter was 20.7%, compared with an adjusted tax rate of 15.4% for the same period last year.

  • Net income was $887 million for the second quarter, compared with adjusted net income of $905 million for the same quarter last year.

  • Our diluted earnings per share were $1.33 compared with adjusted EPS of $1.34 in the second quarter last year.

  • Days services outstanding were 42 days compared to 44 days last quarter and 39 days in the second quarter of last year.

  • Free cash flow for the first quarter was $50 million, resulting from cash generated by operating activities of $155 million, net of property and equipment additions of $104 million.

  • Our cash balance at February 28 was $3.2 billion, compared with $4.9 billion at August 31.

  • With regards to our ongoing objective to return cash to shareholders, in the second quarter we repurchased or redeemed 7 million shares for $816 million at an average share price of $117.27 per share.

  • At February 28 we had approximately $4.3 billion of share repurchase authority remaining.

  • As Pierre just mentioned, our Board of Directors declared a dividend of $1.21 per share, representing a 10% increase over the dividend we paid in May of last year.

  • And this dividend will be paid on May 15, 2017.

  • So at the halfway point in 2017, we feel good about our results and our positioning to deliver on our full-year business outlook.

  • We continue to be laser focused on driving our business to achieve our core financial objectives which include: growing faster than the market, delivering modest margin expansion and strong EPS growth, investing at scale for market leadership and generating strong cash flow which is both invested in the business and returned to shareholders through disciplined and smart capital allocation.

  • With that, let me turn it back to Pierre.

  • Pierre Nanterme - Chairman & CEO

  • Thank you, David.

  • Our strong performance in the second quarter and year to date demonstrates that we are executing our strategy very well to position Accenture as the leading and most innovative professional services company for the new digital world.

  • With 7% revenue growth in local currency in the first half of the fiscal year, we are clearly growing faster than the market.

  • This is driven by our accelerated rotation to The New, digital, cloud and security-related services, which generated revenues of about $8 billion in the first half, more than 45% of total revenues, and continued to grow at a strong double-digit rate.

  • And I'm particularly pleased that we have achieved these results while continuing to invest for the future in strategic acquisitions, in building assets and solutions and the skills of our people, while at the same time returning substantial crash to shareholders.

  • For Accenture, acquisitions are an engine to drive organic growth above the market.

  • And we have stepped up our pace of acquisitions, investing more than $800 million of capital the first half of the fiscal year.

  • In the second quarter alone we completed or announced 11 acquisitions to further strengthen our capability.

  • In digital, we are acquiring SinnerSchrader one of the largest digital agencies in Germany.

  • In cloud, we acquired solid-serVision, a leading ServiceNow provider.

  • In security, we acquired Endgame federal services business and announced the acquisition of iDefense and Arismore.

  • Avanade, our majority owned joint venture with Microsoft acquired Infusion, a leading provider of digital transformation services in the Microsoft ecosystem.

  • And we completed three acquisitions that further enhance our industry-deep expertise, InvestTech in asset management, Seabury Group in aviation and Davies Consulting in utilities.

  • Across Accenture we are leveraging the capabilities we have acquired to bring even more innovation to clients and to drive growth and scale organically.

  • With MOBGEN, which is part of Accenture Digital, we teamed with Shell and Jaguar Land Rover to create the first-ever payment system in a car.

  • This new innovation allows drivers to pay at Shell stations using an in-car touch-screen and app, ultimately delivering a better and more convenient customer experience.

  • In banking and capital markets, our recent acquisitions of InvestTech and Beacon Consulting are further strengthening our asset management capabilities, adding deep skills and industry expertise which has enabled us to win new business with top-tier asset managers.

  • And in security, with the capability of FusionX, which we acquired in 2015, we are helping a large international resort company safeguard millions of daily transactions, providing advanced services such as security audit across 15 properties, digital identity management and rigorous testing to prevent cyber attacks.

  • We'll still continue to make significant investments in our unique innovation architecture which integrates our capability across research, ventures, labs and studios to pioneer new ways of collaborating with clients to develop and deliver disruptive innovations.

  • As part of our innovation-led approach, we are opening new facilities around the world, including several in just the last few months.

  • In Dublin, we opened The Dock, our new multi-disciplinary innovation, R&D and incubation hub where all elements of our innovation architecture come to life.

  • The Dock is a launch pad for our more than 200 researchers to innovate with clients and ecosystem partners with a particular focus on artificial intelligence.

  • In Hong Kong we launched an Accenture interactive studio where we are bringing together end-to-end digital customer experience services for clients.

  • In London and Singapore we opened new Accenture Liquid Studios designed to help clients apply rapid development techniques like Agile methodologies and DevOps to quickly turn concepts into products.

  • And finally in the United States, we are accelerating our innovation investment, including 10 new innovation hubs.

  • We just opened our first one in Houston, enabling us to collaborate more closely with clients to co-create and scale innovative solutions.

  • Turning to the geographic dimension of our business, I'm going to comment on our results for both the quarter and the first half of the year.

  • In North America, we grew revenues in local currency 4% for the quarter and 5% year to date, driven by the United States where we continue to grow ahead of the market.

  • And given our strong market position and pipeline, we expect to see stronger growth in North America in the second half of the fiscal year.

  • In Europe we continued to grow significantly ahead of the market with 7% revenue growth in local currency for both the quarter and the first half, driven primarily by double-digit growth in the United Kingdom, Germany and Switzerland.

  • We are confident Europe will keep up this strong pace in the second half.

  • And in growth markets we were very pleased with our 9% growth in local currency for the quarter and 10% year to date, led once again by very strong double-digit growth in Japan as well as strong growth in China and Australia.

  • We expect growth markets to accelerate its growth in the second half.

  • Before turning it back to David, I want to share a few thoughts on our current strategy to lead in The New.

  • The large-scale transformation of our business is requiring a very significant investment in our people to ensure they have the most relevant skills to sell our clients, both today and in the future.

  • We are proactively training and up-scaling thousands of people in key areas such as cloud, artificial intelligence and robotics.

  • In new IT alone, which is all about new architectures, intelligent platforms and automation, we have already trained more than 70,000 people in just over a year.

  • Our approach to continuously invest in the skills and capabilities of our people helps us meet the needs of our clients and enhances our ability to attract the very best talent in our industry.

  • And that is why I'm very proud that Accenture was recently named one of the Fortunes best companies to work for, for the ninth consecutive year.

  • So with that, I will turn the call over to David to provide our updated business outlook.

  • David?

  • David Rowland - CFO

  • Thank you, Pierre.

  • Let me now turn to our business outlook.

  • For the third quarter of FY17 we expect revenues to be in the range of $8.65 billion to $8.90 billion.

  • This assumes the impact of FX will be a negative 2.5% compared to the third quarter of FY16 and reflects an estimated 5% to 8% growth in local currency.

  • For the full FY17, based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in US dollars will be negative 2% compared to FY16.

  • For the full FY17 we now expect our net revenue to be in the range of 6% to 8% growth in local currency over FY16.

  • Before I continue with our business outlook, as a reminder, in March 2016 we announced the termination of our US pension plan.

  • We expect to record a non-cash charge of approximately $425 million upon final settlement in quarter three 2017.

  • We will provide both GAAP and adjusted quarter-three and year-to-date results.

  • For operating margin on an adjusted basis, we continue to expect FY17 to be 14.7% to 14.9%, a 10 to 30 basis point expansion over FY16 results.

  • We continue to expect our annual effective tax rate on an adjusted basis to be in the range of 22% to 24%.

  • For earnings per share on an adjusted basis and reflecting our updated revenue range, we now expect full-year diluted EPS for FY17 to be in the range of $5.70 to $5.87, or 7% to 10% growth over adjusted FY16 results.

  • For the full FY17 we continue to expect operating cash flow to be in the range of $4.6 billion to $4.9 billion, property and equipment additions to be approximately $600 million and free cash flow to be in the range of $4 billion to $4.3 billion.

  • We continue to expect to return at least $4.2 billion through dividends and share repurchases and also continue to expect to reduce the weighted-average diluted shares outstanding by slightly more than 1%, as we remain committed to returning a substantial portion of cash to our shareholders.

  • And finally, for the full year, we now expect to invest in the range of $1.5 billion in acquisitions.

  • With that, let's open it up so we can take your questions.

  • Angie?

  • Angie Park - Managing Director & Head of IR

  • Thanks, David.

  • I would ask that you each keep to one question and one follow-up to allow as many participants as possible to ask a question.

  • Shannon, would you provide instructions for those on the call?

  • Operator

  • (Operator Instructions)

  • Bryan Keane, Deutsche Bank.

  • Bryan Keane - Analyst

  • Want to ask on bookings, it came in at $9.2 billion.

  • I know the Street was at $10 billion, and $9.2 billion, I think, is down 3% year over year.

  • But it sounds like that was within the range of your expectations.

  • So trying to gauge, was bookings a little bit lighter than you expected?

  • Or was the Street just too aggressive in their assumptions?

  • And then, secondly, on the potential for stronger growth in second-half 2017, maybe you can give us an idea of what that looks like between consulting and outsourcing.

  • In particular, consulting slowed a little bit this quarter but maybe it sounds like it's going to pick up.

  • Thanks so much.

  • David Rowland - CFO

  • Yes, first of all on the bookings, putting aside the consensus estimate, what I had signalled last quarter is that we felt confident that bookings would be stronger in the second quarter than the first quarter, beginning a pattern of building through the year, which is typically what we've seen.

  • And so we ended up with about $1 billion more in bookings in the second quarter versus the first quarter.

  • That's consistent with the comments that I made and it's in the range that we expected.

  • As you know, there's -- in any particular quarter, there are a few deals that can fall on either side of the line.

  • So we will always have a range that we expect to land in.

  • We're very solidly in the range that we expected.

  • And for the full year, we're very optimistic about our bookings.

  • As I've said, we began the third quarter, second half of the year, with a healthy pipeline and we expect to see continued strong bookings in the third and fourth quarter, supporting our revenue guidance.

  • In terms of the growth by type of work, which I think was the other part of your question, is that right?

  • I guess he's dropped off the line.

  • So for the full year, we expect consulting type of work growth to be in the mid-to-high single digits and we expect outsourcing type of work growth to be in the mid-to-high single digits, as well.

  • If you look at it by business dimension, which I also commented on, we think strategy and consulting services combined will be in the mid-single-digit range.

  • So we do see an increase in the growth rate of our strategy and consulting services combined in the second half of the year.

  • We see application services in the mid-single-digit range.

  • We see operations in the double-digit range.

  • And, of course, The New will continue to grow very strong double-digit growth throughout this year.

  • Bryan Keane - Analyst

  • Okay, thanks so much.

  • Operator

  • Jim Schneider, Goldman Sachs.

  • Jim Schneider - Analyst

  • Thanks for taking my question.

  • I was wondering, to follow up on the previous question, you delivered pretty good 6% growth this quarter and there was a little bit of last quarter came.

  • So can you talk about -- you talked about acceleration in the back half of the year, so can you talk about some of the factors that you're seeing that would lead you to not raise your revenue outlook for the full year, given the commentary you just made about the back half?

  • David Rowland - CFO

  • Let me give a few comments and Pierre will perhaps want to make some comments as well from his perspective.

  • Let me start, when we provided full-year guidance of 5% to 8%, we've really entered the year with one possible scenario where the growth in the first half of the year would be, relatively speaking, lower than the second half of the year.

  • And that scenario in fact is continuing to play out.

  • As we always say, we started the year, although way out of range at 5% to 8%, as we say, working hard each and every day to be at the upper end of the range.

  • And that is still our focus.

  • In terms of what's underneath that, there's a couple of ways I could help you understand the way we look at the first half versus the second half of the year.

  • But one way is through the lens of what I have called out as these three concentrated areas of pressure which make up 15% to 18% of our revenue overall.

  • And when you look at those three areas -- energy, chemicals and natural resources, and communications and media -- two of those three areas we see and we believe we will see positive growth in the second half of the year relative to where they were in the first half of the year.

  • And we have some confidence in that.

  • Beyond that, when you look at the rest of our business which is growing 10% on a year-to-date basis, even within that, we see certain areas of our business that did have positive growth in the first half of the year, but we expect will have even more positive growth in the second half of the year.

  • And an industry that comes to mind is health, for example, which has been lower in North America but we expect will be stronger in the second half of the year, more in the typical growth rates that we expect for health.

  • So overall, the year is really playing out as we expected.

  • We continue to work hard to try to land in the upper end of our range as we always do.

  • Supporting our confidence level in the second half of the year, we narrowed the range to 6% to 8%.

  • Pierre Nanterme - Chairman & CEO

  • It's hard to build on what David said, he said it very well.

  • To put it very simply, we feel very good for the second half of the year.

  • That's it.

  • Based on facts.

  • We have very good bookings.

  • We have good pipeline.

  • We have great momentum in most parts of our business.

  • Just to give you a clue, we're covering 13 industries, groupings, if you will, 13 industries.

  • On these 13 industries, 10 are positive.

  • And on the 10, 6 are high single -- when I say high single, one is at 9.5%, let's round to 10% for simplicity -- 6 would be double digit.

  • So you could only be positive when you see such a momentum.

  • Indeed, we have three very specific situations.

  • And frankly, these three situations, at least two are linked to some client situation where indeed the business has been slowing down for absolutely good and valid reasons.

  • And we have evidence that these two industries, in resources, CNR and energy, will be back in the second half of the year.

  • So I'm extremely positive for the second part of the year.

  • Operator

  • Tien-Tsin Huang, JPMorgan.

  • Tien-Tsin Huang - Analyst

  • Thanks for taking the call.

  • I will ask about, I guess you just talked about the three areas of pressure.

  • Some of them are linked to client situations.

  • I'm curious, have you been able to replenish your pipeline?

  • Or are you seeing just comps improve?

  • Are you actually selling into those existing clients?

  • I'm trying to understand how you're able to remix out of the troubled areas and see improvement there, if that makes sense.

  • David Rowland - CFO

  • I would say it's a combination of the two.

  • Just to be blunt, it is a combination of the two.

  • There is a benefit from the comps getting easier and that's just the math.

  • But more importantly, they're really underlying fundamental improvements that we see in the business activity, the dialogue that we're having with our clients, the investment in digitization in addition to the cost-rationalization focus that those industries have had for so many quarters now.

  • And so the comps are part of it, but there is some fundamental improvement in the business.

  • A lot of green shoots that we see that I think have us much more optimistic about the trajectory.

  • Pierre Nanterme - Chairman & CEO

  • And I would add, if you look at resources which has been one area of watch carefully, again, just to talk because you don't mention utilities.

  • Our utilities business is continued growing double digit.

  • This one is on reasonably good fire and we're doing very well because this is an industry rotating rapidly to The New.

  • And you have a direct correlation in the business with the rotation to The New from our clients and the performance of these industries.

  • This is as simple as this.

  • Energy is back.

  • And I think, when I look at the three, energy, and then you have CNR, chemical and natural resources.

  • CNR being the smallest of the three, to be clear.

  • And so energy is very important moving forward.

  • And we are getting more and more evidence that energy will perform much better in the second part of the year.

  • Tien-Tsin Huang - Analyst

  • I see, okay.

  • A follow-up would be the M&A contribution in the quarter and for the year.

  • It sounds like you upped the spend targets $1.5 billion.

  • David Rowland - CFO

  • Yes, for the full year we continue to expect to be in the range of 2%.

  • But if you peel it back, H1 is, let's say closer to 1.5% and H2 would be closer to 2.5%.

  • So in the second half of the year we will see an additional contribution in inorganic relative to H1.

  • But for the full year it will still be in the 2% range.

  • The additional spend, up to $1.5 billion, Tien-Tsin, a lot of that will happen in the fourth quarter.

  • And the revenue impact of those transactions is much more relevant to FY18 than it would be FY17.

  • Tien-Tsin Huang - Analyst

  • Got it, got it.

  • Thank you so much.

  • Operator

  • David Grossman, Stifel Financial.

  • David Grossman - Analyst

  • I know there's been already several questions about growth, but if you look back, consulting growth over the last four years has been pretty lumpy, 2013, 2014 relatively weak, 2015 and 2016 relatively strong.

  • And this year is falling somewhere in between.

  • I know we've had some fairly significant technology cycles, as well as peers that are outlining some pretty significant industry cycles impacting growth for the entire industry.

  • But can you help us think through what the growth in the consulting business should really look like on a normalized basis, if there really is such a thing, recognizing that you've got a portfolio and there's always going to be pluses and minuses each year?

  • David Rowland - CFO

  • I would say on a normalized basis, consulting and strategy services combined would be in the mid-single-digit range to, let's say, high-single-digit, depending on the cycle that we're in.

  • So it's going to be a mid-to-high single-digit contributor across our portfolio of businesses.

  • The consulting growth, to be clear as well, is connected to this dynamic that we talked about with our overall growth.

  • Meaning that if you look at these three industries that are contracting, primarily because of these cyclical pressures, that has had an impact, in recent quarters in particular, on our consulting and strategy growth rate.

  • And we think that, that drag, if you will, that we've seen the last, let's say, the last few quarters, will start to mitigate some in the second half of the year.

  • We're also making investments in our consulting business, which start to help drive our growth rate in the second half of the year and beyond, as well.

  • Pierre Nanterme - Chairman & CEO

  • The line, the direction, should be mid-to-high single digit.

  • We believe this is where the consulting business should be.

  • Sometimes it's going to be higher than this because you have a combination of good factors and sometimes you're just a bit high.

  • And here we have this combination of these three situations creating a disproportionate drag on our consulting.

  • So as we mentioned before, definitely two of the three will get back and so the consulting, as we shared it, will get back as well.

  • On the other side of the spectrum, we are not only investing in what we're calling The New, digital, cloud and security, but we, as you know, are putting some investments in building extra-deep skills in areas where we believe that could be higher growth in a very specific way.

  • You've seen the acquisition of Kurt Salmon, a premium brand in retail North America.

  • We are doing the same in aviation in very deep skills.

  • In investment management where we believe it's going to be a great market and we are making acquisitions there on a very targeted basis.

  • So I'm extremely confident that the consulting will be back.

  • David Grossman - Analyst

  • Right.

  • And if I could ask a quick follow-up to your comment about rescaling.

  • Obviously the pace and breadth of the current cycle has driven the need to rescale at a faster-than-normal pace.

  • That aside, is it fair to expect after this year that the pace of acquisitions would continue to contribute this 2% rate of growth?

  • Or would you expect that to come back a little bit as the cycle matures?

  • Pierre Nanterme - Chairman & CEO

  • Yes.

  • We're putting very significant attention on the skills of our people.

  • We just broke the 400,000 mark in terms of people.

  • And we want to have 400,000 talented people.

  • And by talented people, I mean having the right skills, is what we mean by talented people.

  • The right skills for today and more important, the right skills for tomorrow.

  • So what we did, and not starting now but starting years ago, is to make sure that in training and education, we are investing significantly.

  • I think the number is public, we are roughly investing $900 million in training and education to make sure that we have the best-skilled people and we are able, as well, to attract the best talent.

  • So we're combining our organic rescaling, if you will, $900 million.

  • We have digitalized all our training to make sure that our cost of training is extremely efficient.

  • And I was impressed, in case you recognize my friend Bhaskar Ghosh, on what he has been doing with our Accenture Technology business in rescaling last year in what we call a new IT, 70,000 people.

  • He's managing roughly 200,000 people, Bhaskar, roughly, if I may say.

  • And the goal for us is to reskill 100% of these people over three years, 70,000 plus 70,000 plus 70,000.

  • In addition, we are recruiting in the true acquisition, very deep skills, very deep skills.

  • We believe it's going to take too long to grow organic.

  • And so we have a good, I think, a two-pronged strategy, if you will, investing in our people to make them relevant.

  • I think this is something we owe to our people.

  • We have a responsibility, I feel that way, I have the responsibility to make them relevant for the future.

  • And then complement with high-notch iconic talent we are getting from the market, so we have a kind of perfect blend.

  • David Grossman - Analyst

  • Very good, thank you.

  • Operator

  • Edward Caso, Wells Fargo.

  • Edward Caso - Analyst

  • My question is really around robotics and artificial intelligence from two dimensions.

  • How much are you applying that to your own business to de-link a little bit, revenue from people growth?

  • And how much are you helping your clients and at what pace is it coming on?

  • Thanks.

  • Pierre Nanterme - Chairman & CEO

  • Thanks for the question.

  • Answer to your question number one is extensively and answer to your question number two is extensively.

  • What we are, especially in Accenture Technology and in Accenture Operations and, of course, in Accenture Digital, we have now infused in Accenture Technology all new capabilities for us, intelligent platforms.

  • The name we're using, the public name, is myWizard.

  • myWizard is the first in that category of intelligent platform, so you can develop code using more and more intelligent virtual agent.

  • So we're doing that massively, but it's not enough.

  • We're, indeed, applying to Accenture Technology, technology data centers.

  • And more important to Accenture Operations, in our video centers RPAs, robotic process automations, that we are executing for Accenture.

  • And it's interesting to see that many clients are visiting us and considering Accenture of now the benchmark and the learning from what we do to apply to clients.

  • So extensively in Accenture because the name of the game is not labor, it's productivity.

  • And that's always been the name of the game in Accenture.

  • So we want to operate at maximum productivity and efficiency, with talented people.

  • That's what we have in mind.

  • And as you said, starting to see in some parts of our video business, the de-correlation between revenue and labor.

  • And we believe strongly that the combination of artificial intelligence, machine learning, robotic process information, in the coming five years will make a significant difference in this correlation between labor to revenue.

  • From a client standpoint, huge demand.

  • I've just been pitching RPA and closing RPA deals last week, just to give you a view.

  • It's extremely vibrant, why?

  • Because you know the clients generally feel the same as we said in remembering one of our IA Days, digitalization and rationalization.

  • Digitalization to create new business models and all the architecture we have been putting in place in The New is resonating with that, with Accenture interactive, mobility, analytics, cloud and security.

  • And rationalization RPA is at the heart of rationalization to robotics and automation.

  • And the demand is just growing and we are very well positioned.

  • Edward Caso - Analyst

  • My other question is on the benefits side of your pension charge.

  • What kind of, in basis points, contribution to operating margin will that drive in FY18?

  • Thanks.

  • David Rowland - CFO

  • It's not material.

  • In the scheme of Accenture, the benefits that we're deriving from doing this are not that material in terms of the bottom line.

  • Edward Caso - Analyst

  • Thank you.

  • Operator

  • David Ridley-Lane, Bank of America.

  • David Ridley-Lane - Analyst

  • I did want to -- touching on that last question, I know you do not manage to gross margin, but the year-to-date gross margin expansion is notable, given the longer-term trends.

  • Are you seeing the benefit of automation show up there?

  • Or is this driven more from the revenue mix shift towards digital?

  • Trying to get a sense of is this theme of automation, robotic process automation, helping on the gross margin today?

  • David Rowland - CFO

  • Let me say that even though gross margin has looked here the last two quarters, our message still has stayed the same.

  • For many reasons we've explained, we really focus more on operating margin.

  • Having said that, to your question, the big driver, I think when you look at the first two quarters, has been improvement in our contract profitability.

  • So our cost to serve clients is one of the major components in our gross margin.

  • We have seen improvements in contract profitability which reflects, broadly, some of the improvements we've seen in pricing.

  • It reflects -- there's some mix shift as -- let's say we have a higher percentage of higher value-added services, even higher percentage of those, that type of work which includes digital but not limited to digital, in the mix, et cetera.

  • And as well, just the overall efficiency of our payroll structure, which is of course the biggest driver of our costs overall.

  • And so it's more about contract profitability and managing our payroll efficiency at a high level of efficiency.

  • Is automation in the mix of our improved contract profitability?

  • It is.

  • But in no way would that be a dominant driver.

  • It's in the mix but with many other things as well.

  • David Ridley-Lane - Analyst

  • And then just as a quick one.

  • Do you see any drag from regulatory uncertainty among your US health insurance clients?

  • Or said differently, since you expect an acceleration there, what would be the main drivers to get you there?

  • David Rowland - CFO

  • We did see an impact in the pace of decision making.

  • When you look back now in the rear-view mirror, we did see an impact in the pace of decision making in health in North America during the first half of the year.

  • We believe, and we've got fact points and tangible evidence that we would point to, that, that slower pace of decision making is behind us.

  • And that, as we've now turned into the new calendar year, every month that goes by, we're a month into the new administration.

  • Then the decision making has resumed at normal levels, and that's part of the reason why we are more -- why we are positive on improved growth rates in the second half of the year.

  • We did see an impact in the first half of the year.

  • We believe that, that's largely behind us.

  • Operator

  • Brian Essex, Morgan Stanley.

  • Brian Essex - Analyst

  • Thank you for taking the question.

  • I was wondering if you could dig in a little bit to banking financial services.

  • You called out North American capital markets mix improving.

  • Can you provide a little bit of color behind the improvement in that business and what the primary drivers of that improvement might be?

  • Pierre Nanterme - Chairman & CEO

  • Yes.

  • Overall Financial Services is doing very well.

  • We have been posting, I think, 8% growth in the -- .

  • David Rowland - CFO

  • Banking and capital markets is double digit.

  • Pierre Nanterme - Chairman & CEO

  • Is double digit.

  • So we're doing very well.

  • In North America most especially, we're starting to see again more demand in The New.

  • Second, we are working in having a more diversified portfolio of clients, and not only the kind of big category leaders, if you will, due to more significant regionalization of our business in the United States where we expect great benefits starting in H2.

  • And in addition, as I mentioned especially in investment management which is part of capital markets, we've made a few acquisitions.

  • You've seen Beacon, and they are providing as well deep skills.

  • So again, as in everything, it's a combination of two or three factors you're putting together to create growth.

  • And we see some more optimism, as well, from clients, linked to the expected deregulation of some part of their business.

  • So all of this put together is creating an environment which is getting better.

  • Brian Essex - Analyst

  • Great, that's very helpful.

  • As a follow-up, could I ask about Accenture Interactive?

  • I've seen some interesting moves in the press recently there.

  • How big is that business?

  • Is that primarily CMT focused?

  • How do you plan to weave that in with your digital aspirations?

  • Pierre Nanterme - Chairman & CEO

  • Yes.

  • I'm extremely pleased with Accenture Interactive.

  • You're giving me the opportunity to recognize the leader of Accenture Interactive, Brian Whipple, who is doing a great job in leading that part of the business.

  • In less than only seven years, or something like this, we created the largest pure player in digital marketing.

  • So the digital agency of Accenture is now one of the largest and a category leader.

  • We are leading in digital design, especially after the acquisition of a company named Fjord.

  • And many other acquisitions, the last one between Karmarama in the UK which is a premium independent, the best independent company in the UK.

  • Digital production, you remember the acquisition of avVenta some years ago.

  • Digital commerce, which acquisition is very important on back of the acquisition of Acquity we made in the US some years ago.

  • And all what we are doing in terms of customer analytics.

  • So we were very pleased that last year Advertising Age ranked Accenture Interactive number one.

  • And for us it's a very critical milestone.

  • We see more and more clients in determining from the so-called holding companies to Accenture Interactive.

  • And now I'm very pleased to report that we will be very close to $6 billion [this fiscal year] (corrected by the company after the call) in Accenture Interactive, making us a category leader.

  • So I couldn't be more pleased with Accenture Interactive because you know -- sorry for elaborate a bit, I know we are running always out of time.

  • Again, I'm passionate about this so I'm sharing my passion with you.

  • The business in the future will be more and more driven by experience and design, of new capabilities, of new products, of new ways of engaging with customer, consumer, patient, employees.

  • So for us it was absolutely critical to put on the top of our services, the experience, this design-led experience-led kind of capability.

  • And just to give you a data point, I think we acquired Fjord, they had 150 people roughly, 150, 180, something like this, less than 200.

  • Now we're going to crack the 800 people, in short, making certainly Fjord one of the largest pure player in digital creative design.

  • That's what we do.

  • And we are pleased.

  • Brian Essex - Analyst

  • Great.

  • So quite a bit larger than we last heard, so that's great to hear.

  • Very helpful, thank you.

  • Pierre Nanterme - Chairman & CEO

  • We like to be.

  • In our rotation to The New -- sorry to be too long, but in our rotation to The New in interactive, mobility, analytic, cloud, and security, we want not only to be the number one, if you addition is all things.

  • This is why we always have $8 billion in H1 only, as we want to be number one in each of the five.

  • That's what we mean by scaling to lead.

  • And this is what we are doing relentlessly.

  • Angie Park - Managing Director & Head of IR

  • Shannon, we have time for one more question and then Pierre will wrap up the call.

  • Operator

  • Joe Foresi, Cantor Fitzgerald.

  • Joe Foresi - Analyst

  • What inning do you think digital might be in?

  • And what's the next phase of the digital movement?

  • David Rowland - CFO

  • I would say that the digital wave is still -- in your baseball analogy, I would say it's still in the early innings.

  • If you talked about it in terms of the maturity curve, it is low on the maturity curve.

  • There is a ways to go.

  • Pierre Nanterme - Chairman & CEO

  • Early days.

  • If you look at this, some capabilities are more mature than the others.

  • When we're putting that in our Accenture framework we said we have three waves.

  • The digital consumer, and this one is quite maturing a lot because you see this is probably where we doing the majority of Accenture Interactive business of around $6 billion.

  • Then you have the digital enterprise, how you digitalize all the parts of the enterprise.

  • And here the robotics and the automation we are bringing a lot.

  • So I think this is coming.

  • And then you have what we call in digital operations an IoT.

  • This is nascent.

  • That might be certainly the biggest wave of the three.

  • And so we are positioning Accenture already in what we're calling an industry X.0.

  • We're probably 4.0 as we speak, but we're going to be 5.0, 6.0.

  • And we are positioning Accenture on mobility, productive platform, Internet of Things.

  • We have already developed many partnerships in the ecosystem with OEM providers to extend our reach to this industry incarnate.

  • We have labs.

  • I'm thinking about what we have in Bangalore, what we have in Beijing, when we are developing very deep industry solutions in the context of the IoT.

  • So it's early days.

  • It's going to be a wave for probably a couple of decades.

  • Joe Foresi - Analyst

  • Okay.

  • And then as a quick follow-up, how is competition in outsourcing, particularly pricing?

  • Thanks.

  • David Rowland - CFO

  • I would say really no notable change in the competitive landscape in outsourcing.

  • If you're asking specifically about the application maintenance piece of our application services, that continues to be a very, very competitive pricing environment.

  • So that is more of the same.

  • And I would say if you look at BPO as another big piece of outsourcing, I would say no notable change.

  • Pierre Nanterme - Chairman & CEO

  • No notable change but some at Accenture, again because if there is something we hate in our Company, it's commercialization of services.

  • So we're fighting against commercialization always to move and to rotate to higher-value services.

  • The business you're mentioning is subject to commercialization at great pace.

  • Our answer to fight against commercialization has been to infuse, as I mentioned before, through Bhaskar Ghosh and Debbie Polishook, leading Accenture Technology and Accenture Operations.

  • But a lot of robotics, a lot of automation, less labor arbitrage, more technology, more intelligence.

  • And so indeed, we want to make these activities more tech-automated-led, less labor-intensive like many of our competitors been doing.

  • And we are following a very different trajectory.

  • Joe Foresi - Analyst

  • Thanks.

  • Pierre Nanterme - Chairman & CEO

  • Okay, it's time to wrap up.

  • Thanks a lot to have been so patient with us.

  • Thanks again for joining us on the call today.

  • As you can tell, and have heard from David and I, we are very confident in our ability to deliver another strong year in FY17, to continue gaining significant market share as we do, to even further accelerate our rotation to new and innovative services.

  • And at the same time as we are investing significantly for the future, continuing delivering value for our clients, our people, and our shareholders.

  • At the same time, we transform Accenture to be even more successful.

  • We look forward to talking with you again next quarter.

  • In the meantime, if you have any questions, please feel free to call Angie.

  • All the best and talk to you very soon.

  • Operator

  • Ladies and gentlemen, this conference will be available for playback beginning today at 10:30 AM Eastern Time, running through Thursday, June 22, 2017, at midnight Eastern.

  • You may access the AT&T playback service by dialing 1-800-475-6701 and entering the access code of 418844.

  • International participants please dial 320-365-3844, with the access code of 418844.

  • Once again, this conference will be available for playback beginning today at 10:30 AM Eastern Time, running through Thursday, June 22, 2017, at midnight Eastern Time.

  • You may access the AT&T playback service by dialing 1-800-475-6701.

  • International participants please dial 320-365-3844, with the access code of 418844.

  • That does conclude our conference for today.

  • Thank you for your participation and for using AT&T.

  • You may now disconnect.