埃森哲 (ACN) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Accenture's Second Quarter Fiscal '18 Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Karen, and thanks, everyone, for joining us today on our second quarter of fiscal 2018 earnings announcement.

As Karen 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 fiscal year 2018.

We will 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're talking about revenues before reimbursements or net revenues.

Some of the matters we'll discuss on this 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 reports on Form 10-Q and other SEC filings.

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

During our call today, we will 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 Investors Relations section of our website at accenture.com.

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

Now let me turn it over to Pierre.

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

We are very pleased with our excellent financial results for both the second quarter and the first half of fiscal year '18.

For the quarter, we again delivered strong double-digit revenue growth, which was broad-based across all dimensions of our business.

We continue to grow ahead of the market and are clearly gaining significant market share.

I am particularly pleased with our record new bookings.

The very strong demand we are seeing especially in digital, cloud and security demonstrate that we continue to provide clients with highly differentiated and relevant services.

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

We delivered excellent new bookings of $10.3 billion for the quarter and $20.2 billion for the first half.

We grew revenues 10% in local currency for both the quarter and year-to-date.

We delivered outstanding earnings per share for the quarter of $1.58 on an adjusted basis, a 19% increase.

And for the first half, EPS grew 16% on an adjusted basis.

Operating margin was 13.4% for the quarter and 14.5% for the first half, a contraction of 20 basis points year-to-date.

We generated very strong free cash flow of $791 million for the quarter and nearly $1.7 billion year-to-date.

And we continue to return substantial cash to shareholders through share repurchases and dividends, including $2.2 billion year-to-date.

Today, we announced a semiannual cash dividend of $1.33 per share, which will bring total dividend payment for the year to $2.66 per share, a 10% increase over last year.

So as we move into second half of fiscal year '18, I feel very good about the momentum in our business.

We are raising our business outlook for revenues, earning per share and free cash flow, and I am confident in our ability to deliver another strong year.

Now let me hand over to David, who will review the numbers in greater detail.

David, over to you.

Thank you, Pierre, and thanks all of you for taking the time to joining us on today's call.

Let me start by saying that we were very pleased with our financial results in the second quarter, which put us on a strong trajectory to exceed the net revenue, EPS and cash flow guidance provided at the beginning of the year.

Once again, our results this quarter reflect broad-based momentum across every dimension of our business and reinforce our relevance and differentiation as the market leader in innovating and leading in "the New."

Before I get into the details of the quarter, let me summarize the major headlines of our results.

Continued strong top line growth was the first major headline, with net revenues increasing almost $1.3 billion, reflecting growth of 10% in local currency.

The overall theme of broad-based growth was evident again this quarter with strong growth across all 5 operating groups and all 3 geographic areas with double-digit growth in 3 operating groups and in both Europe and the Growth Markets.

Growth continues to significantly outpace the market, driven by strong double-digit growth in all 3 components in "the New", including digital, cloud and security-related services.

As the second major headline, we delivered EPS in the quarter of $1.58 on an adjusted basis, reflecting 19% growth over last year.

This level of EPS growth was driven primarily by 13% growth in our operating income.

At the same time, operating margin of 13.4% decreased 30 basis points compared with quarter 2 of last year.

Our operating margin primarily reflects the impact of lower profitability in H&PS as well as the impact of the record level of investments made in fiscal '17 to acquire critical skills and capabilities in high-growth areas of our business.

We do expect operating margin expansion in the second half of the year, and I'll come back to that in our business outlook.

The third major headline relates to outstanding cash flow in the quarter of $791 million, resulting in $1.7 billion on a year-to-date basis, which puts us on a very strong trajectory for the full year.

For the first half of the year, we continue to execute against our strategic capital allocation objectives first by investing over $340 million primarily attributed to 5 transactions and second, by returning roughly $2.2 billion to shareholders via dividends and share repurchases.

With that said, let me turn some -- to some of the details starting with new bookings.

New bookings were $10.3 billion for the quarter, representing a record high and our third consecutive quarter with bookings of $10 billion or more.

Our consulting bookings were $5.7 billion with a book-to-bill of 1.1, and outsourcing bookings were $4.6 billion with a book-to-bill of 1.0.

Bookings continue to be well balanced across the dimensions of our business and the dominant driver of our bookings in the quarter continue to be high demand for digital, cloud and security-related services, which we estimate represented more than 60% of our new bookings.

Looking now at revenues.

Net revenues for the quarter were $9.6 billion, an increase of 15% in USD and 10% in local currency, reflecting a foreign exchange tailwind of roughly 5.5% compared to the 4.5% impact provided last quarter.

This result was approximately $95 million above the upper end of our FX-adjusted range.

Our consulting revenues for the quarter were $5.2 billion, up 17% in USD and 11% in local currency, and our outsourcing revenues were $4.4 billion, up 13% in USD and 8% in local currency.

Looking at the trends in estimated revenue growth across our 5 business dimensions, growth was led by Application Services, which posted double-digit growth, driven by strong demand in application development services to deploy new technologies.

Operation grew -- operations grew high-single digits.

And Strategy and consulting services combined grew mid-single digits.

And as I mentioned earlier, we continue to deliver strong double-digit growth in digital, cloud and security-related services by leveraging the significant investments we've made in recent years to build highly differentiated capabilities.

Taking a closer look at our operating groups, Communications, Media & Technology led all operating groups with 15% growth in local currency.

Continued momentum was driven by double-digit growth in both software and platforms in communications and media as well as double-digit growth across all geographies.

Resources grew 11% in the quarter driven by strong double-digit growth in chemicals and natural resources and further improvement in energy, which posted strong growth.

We were pleased with the strong balanced growth across all 3 geographies and resources.

Products delivered 10% growth in the quarter, representing its 11th consecutive quarter of double-digit growth, which is an incredible accomplishment.

Growth was led by strong double-digit growth in industrial and strong growth in consumer goods, retail and travel services.

Europe and the Growth Markets both grew double digits, reflecting continued strong demand for our services.

Financial Services grew 7% in local currency, reflecting strong balanced growth in both banking and capital markets and insurance.

Growth was strong across all 3 geographies, including double-digit growth in the Growth Markets.

And finally, H&PS grew 6% with relatively balanced growth in both health and public service, led by double-digit growth in Europe and the Growth Markets and solid growth in North America.

Moving down the income statement.

Gross margin for the quarter was 29.7% compared to 30.1% in the same period last year.

Sales and marketing expense for the quarter was 10.4% compared to 10.5% for the second quarter last year.

And general and administrative expense was 5.9% consistent with the same quarter last year.

Operating income was $1.3 billion in the second quarter, reflecting a 13.4% operating margin, a decrease of 30 basis points compared to quarter 2 last year.

Before I continue with the other metrics, I'd like to highlight that this quarter we recognized a provisional tax expense of $137 million primarily to remeasure our net deferred tax assets at the new lower tax rates.

This expense increased our quarter 2 tax rate by 11% and decreased diluted earnings per share by $0.21.

The following adjusted results exclude this impact.

Our effective -- our adjusted effective tax rate for the quarter was 15.1% compared to an effective tax rate of 20.7% for the second quarter last year.

Adjusted diluted earnings per share were $1.58 compared to EPS of $1.33 in the second quarter last year, and again, this reflects a 19% year-over-year increase.

Our days services outstanding were 40 days compared to 43 days last quarter and 42 days in the second quarter of last year.

Our free cash flow for the quarter was $791 million, resulting from cash generated by operating activities of $924 million net of property and equipment additions of $133 million.

Our cash balance at February 28 was $3.6 billion compared with $4.1 billion at August 31.

With regards to our ongoing objective to return cash to shareholders, in the second quarter, we repurchased or redeemed 5.2 million shares for $804 million at an average price of $1.55, $0.30 per share.

At February 28, we had approximately $2.1 billion of share repurchase authority remaining.

And as Pierre mentioned, our Board of Directors declared a dividend of $1.33 per share, representing a 10% increase over the dividend we paid in May last year.

This dividend will be paid on May 15, 2018.

So at the halfway point of fiscal '18, we delivered very strong results and are very well positioned for the remainder of the year.

Now let me turn it back to Pierre.

Thank you, David.

Our excellent performance in the second quarter and year-to-date demonstrate that we have the right growth strategy and that we are executing extremely well.

With 10% revenue growth in local currency in the first half, we continue to grow much faster than the market, and indeed, we have outperformed our basket of competitors for now 16 consecutive quarters, 4 full years.

Our strong and durable performance reflects our ability to rapidly scale our market-leading position in "the New": digital; cloud; and security services.

And for the first half, revenues from "the New" were nearly $11 billion, more than 55% of total revenues and continued to grow at a very strong double-digit rate.

The accelerated rotation of our business reflect the significant investment we have made over the last few years, including record investments last year in strategic acquisitions, in building assets and solutions and in hiring and developing the most relevant talent.

Let me bring you to light in 2 key parts of our business: Accenture Interactive; and Accenture Security.

With Accenture Interactive, we are scaling to further strengthen our leadership position.

And for the last 2 years, we were recognized by Advertising Age as the world's largest provider of digital marketing services.

Just this month, Walt Disney Studios named Accenture Interactive, along with Fjord, an innovation partner for its new StudioLab.

With our expertise in strategy, design and technology along with our deep industry experience and the applied R&D capabilities of Accenture Labs, we are helping Disney apply emerging technologies, (inaudible) entertainment, artificial intelligence and the Internet of Things to create the future of entertainment.

And we continue to invest in Accenture Interactive to enhance our capabilities and market differentiation, including 4 acquisitions we made in the first half: Mackevision, a leading producer of 3D and immersive content in Germany; Altima, a French digital commerce agency; Rothco, a creative agency in Ireland; and MATTER, a design and innovation firm in the U.S.

We are also rapidly scaling Accenture Security.

Less than 3 years ago, we committed to building a market-leading cybersecurity business to help clients become more resilient to cyber threats.

Today, Accenture Security is one of the largest providers in the market, approaching $2 billion in annual revenues.

Our security business benefit significantly from Accenture's global scale.

And we tailor industry-specific solutions across the full range of security services, including identity and access management, cyber defense, managed security, and strategy and risk.

We are helping a leading insurance company transform its cyber defense with an advanced threat and incident response program, including automation and training for their people, which has dramatically reduced the time to detect and respond to threats.

Accenture has unique ability to scale "the New".

With the width and scope of services we provide end-to-end, from strategy and consulting to digital technology and operations, together with our deep industry expertise, we are positioned at the core of our clients' largest transformation products.

We are working with The Hershey Company on global transformation program with SAP S/4HANA, designed to streamline manufacturing and supply chain processes, gain real-time customer insight, to improve decision-making and accelerate innovation to drive growth.

And we continue to work with clients on mission-critical integrations.

We helped DBS Bank, the largest bank in Southeast Asia, with a successful post-merger integration of the wealth management and retail banking businesses acquired from ANZ Bank in 5 key markets, including Indonesia, Taiwan and Singapore.

Now turning to the geographic dimension of our business.

I'm particularly pleased that we continue to deploy our capabilities in "the New" at scale in the largest markets around the world.

In North America, we delivered 8% growth in local currency, led by another uptick in growth in the United States.

In Europe, we had another quarter of double-digit growth with 10% in local currency, driven by strong double-digit growth in Germany, Italy, France and Spain.

And I'm especially pleased that given our significant market share and gains over the last few years in Europe, we are now positioned as the market leader.

And we delivered another excellent quarter in Growth Markets with 15% revenue growth in local currency.

Japan, again, led the way with very strong double-digit growth.

But we had double-digit growth as well in Australia, Brazil and Singapore.

Before turning back to David, I want to say a few words about innovation.

And now, we are building scale through continued investments in our unique innovation architecture, which integrates our capabilities from research, ventures and labs to studio innovation centers and delivery centers.

To bring even more innovation to clients, we have built a global network of more than 100 world-class centers, where we collaborate with clients and co-create innovative digital solutions.

And we are extending this network to be even closer to clients.

In the last few months, we opened new innovation hubs in Zürich, Tokyo, Boston and Columbus.

We launched a new Liquid Studio in Madrid, and we opened our newest industrial IoT innovation center in Modena, Italy.

Quite simply, innovation is at the heart of everything we do at Accenture.

And we will continue to invest not only to scale our current capability in "the New", but also to anticipate the next waves of technology and business disruptions to keep Accenture ahead of the curve in "the New".

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

David, over to you.

Thanks, Pierre.

Let me now turn to our business outlook.

For the third quarter of fiscal '18, we expect net revenues to be in the range of $9.9 billion to $10.15 billion.

This assumes the impact of FX will be about 5.5% compared to the third quarter of fiscal '17 and reflects an estimated 6% to 9% growth in local currency.

For the full fiscal year '18, based upon how the rates have been trending over the last few weeks, we now assume the impact of FX on our results in US dollar will be 4% compared to fiscal '17.

For the full fiscal '18, we now expect our net revenues to be in the range of 7% to 9% growth in local currency over fiscal '17.

For operating margin, we now expect fiscal year '18 to be 14.8% consistent with adjusted fiscal '17 results.

This assumes approximately 20 basis points of expansion in the second half of the year.

We expect our GAAP annual effective tax rate to be in the range of 24% to 26%, excluding the impact of the U.S. tax law changes.

We continue to expect our annual effective tax rate to be in the range of 22% to 24%.

For earnings per share, we expect our GAAP diluted EPS for fiscal '18 to be in the range of $6.40 to $6.49.

Excluding the change related to U.S. tax law changes, we now expect full year diluted EPS to be in the range of $6.61 to $6.70 or 12% to 13% growth over adjusted fiscal '17 results.

For the full fiscal '18, we now expect operating cash flow to be in the range of $5.2 billion to $5.5 billion, property and equipment additions to be approximately $600 million and free cash flow to be in the range of $4.6 billion to $4.9 billion.

Finally, we continue to expect to return at least $4.3 billion through dividends and share repurchases, and also, continue to expect to reduce the weighted average diluted shares outstanding by about 1% as we remain committed to returning a substantial portion of cash to our shareholders.

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

Angie?

Thanks, David.

(Operator Instructions) Karen, would you provide instructions for those on the call.

(Operator Instructions) And our first question will be from Tien-tsin Huang from JPMorgan.

The -- yes, very strong revenue growth.

Obviously, just -- it looks like it might be coming in at a slightly higher cost.

Maybe what surprised you exactly on the margin front?

I think, you mentioned H&PS.

Can you elaborate there?

We figured these contract profitability gives your subcontractors, and I may have missed it.

If you can just elaborate, that would be great.

Yes.

So on H&PS, there's really 2 things at play.

First of all, we had a decline in profitability that was primarily driven by lower contract profitability on a few large contracts and some of that relates to renewals at lower level of profitability that may have been previously contracted at.

And then secondly, in the mix for H&PS is higher acquisition-related costs for a number of acquisitions that we've done over the trailing 4 quarters.

So those are really the 2 factors in H&PS.

Our leadership team is very focused on the profit agenda in H&PS, and we do expect H&PS' profit to improve in the second half of the year.

But in the quarter, those were the 2 primary drivers.

Right.

So I guess as my follow-up and just a follow-up too on the confidence in margin expansion in the second half, and I guess, more importantly, the reason why Accenture can't return to the typical 10 to 13 bps that we've seen for so long here?

It sounds like you can address those contract issues, but anything else to consider?

What I would say is -- I mean, stating the obvious, this year's guidance at 14.8% is in the context of this year.

It in no way signals anything about what our ability is on an ongoing basis to deliver modest margin expansion.

And while, as you know, I'm not going to provide specific guidance, I do feel comfortable saying in general terms that our strategic objective to over time expand our margins modestly in the 10 to 30 basis point range remains intact.

There isn't anything about this year that changes our view on that.

Next question is from Joseph Foresi with Cantor Fitzgerald.

I wanted to ask about consulting.

It seems like "the New" is driving a lot of the consulting work.

Can you talk about the growth rate there?

And also, about the conversion rate into more steady business, is that about the same?

Or has it changed since prior years?

Yes, indeed.

Our consulting business, as you've seen, has become stronger and stronger.

And you've seen specially, we are very pleased with the bookings we see in our consulting business.

The rotation to "the New" is a factor explaining that we are getting more consulting business, but as well the rotation to "the New" is consulting that is as well creating a ripple effect with the rest of Accenture.

So it has a good contribution in the full range of all services from strategy to consulting, digital and technology and as well, operations.

So "the New" is really impacting across the board.

But we see a very positive impact in our strategy and consulting business as well as in-system integration.

Bookings are very strong and if bookings are very strong, it's because we have a good win and conversion rate.

Yes.

And I'll just add one point to what Pierre said.

I think an important insight in the mix of consulting is a very strong market in our platform business.

And when we talk about our partners, we're talking about SAP, Microsoft, Oracle, Salesforce and Workday primarily.

And that part of our business is growing very well.

There is definitely a lot of market activity around next-generation ERP, and we're benefiting from that in our consulting business.

And as Pierre said, the conversion rate with a higher -- with stronger growth in consulting, those projects on average tend to be shorter in duration.

So bookings do tend to convert to revenue at a faster rate.

Okay.

And then just it looks like the business outside "the New" is improving a little bit.

Can you talk about that and any comments on your strategic -- or your strategy in that -- in the business outside of "the New"?

Yes.

I mean good question.

Now, we could say, "the New" is the business of Accenture.

So I think we will continue talking about rotation to "the New" because what we believe at Accenture is, the waves of these new emerging disruptive technologies will continue coming at an incredible pace.

That's why we continue to talk about "the New" because today, we've been talking a lot about interactive, mobility, analytics, cloud, security.

But we know that to some extent the next "the New", if I could use that language, is coming fast in term of immersive realities, blockchain, even quantum gate and all this technology.

So "the New" is Accenture.

Now the remaining core is pretty solid, and we are pleased with that because, frankly, we have invested as well to continue modernizing the core.

So we didn't play defense, which is something we don't like to do at Accenture, frankly, but we play attack by modernizing our core business.

And I'm thinking about what we've been doing in term of bringing a lot of robotic and automations in our services in term of application outsourcing, in term of business process services.

So we improve and increase the competitiveness of our services vis-a-vis of our clients.

And by the way, it does reflect in the good growth we had in technology and operations.

So we don't let the core down.

We invest in the core, we play in the stack, we modernize, and we continue to be a very strong player and leader in the core.

Next question is from Bryan Keane with Deutsche Bank.

Just wanted to ask about the tax rate.

I know the tax rate was lower.

I think it was 15.1% for the quarter.

But you kind of reiterated the guidance for the year, I think at 22%, 24%.

So I think that implies a second half tax rate that's higher maybe 27% to 28%.

So post-tax reform, just thinking, is that a newer higher tax rate going forward, just thinking about tax?

No.

I wouldn't -- our tax rate is lumpy by quarter.

I mean, the tax rate in any particular quarter is essentially driven by 4 things.

It's driven by the geographic mix, it's driven by change in reserves, it's driven by final determinations, and it's also driven by the tax impact of equity compensation.

So for example, if you look at the second quarter, the second quarter typically has a structurally lower tax rate, the lowest of the 4 quarters, primarily because of the equity compensation and the fact that the equity compensation is primarily granted on January 1. And as you know, when our stock is appreciating as it has been and the stock price is higher than -- when it was initially granted as opposed to the vest date, then we get tax benefit from that, which is what we see, for example, in the second quarter of this year.

So do not read anything into the implied tax rate for the second half of the year or quarter 3 or quarter 4. I would focus more on the annual tax rate and recognize that in any given year, our tax rate is lumpy by quarter 4, any number of reasons.

Okay.

And then just a quick follow-up on tax rate.

I know in the Q, I think, you talked about the effective tax rate could go up 3.5 points in fiscal year '19 due to the adoption of the FASB.

I think it's the inter-entity transfers of assets other than inventory.

Just curious, if we should just expect going forward a higher tax rate as well?

And then just quick question on the operations group.

It just moderated a tad from its consistent double-digit growth.

Just wanted to make sure there wasn't anything implied on that slower growth rate going forward?

Right.

So you are a student of tax when you get into that question.

So yes, we did disclose the ASU that you referenced in our K. And in that disclosure, we commented on a potential impact of up to 3.5 percentage points.

I think I might have also called out at that time that, that is an impact in isolation, but as always, there are other things that impact our tax rate including tax planning.

Also, you're asking about '19, in the case of '19, you're aware that the base erosion tax kicks in, but it kicks in at a lower level than it does in '20.

And so there is a lot of things in the mix in '19.

Again, I don't want to comment -- I'm not going to comment specifically on guidance, but I will say that, as we sit now, subject to change, as we continue to evaluate our tax situation, we don't see a material change in our tax rate in '19 from the guidance -- the adjusted guidance that we're providing this year.

And I'll update that in September, but that's our current view.

Okay.

Helpful.

I'll turn it over.

I just was asking real quick on the operations groups.

Just it -- it had been double digits consistently, and then, it's just high-single digits now.

So just wanted to see if there's any callouts.

Thank you very much.

Nothing...

I'm going to give a quick one.

No change.

No change?

Yes, on operations.

Yes.

Next question is from Bryan Bergin with Cowen.

Wanted to ask on the local currency revenue guide range for the year.

Relative to the strong 10% first half performance, anything you're seeing now in the second half that just would leave you more bullish for the full year range?

One thing is that the inorganic contribution will be incrementally lower in the second half of the year.

That's in the mix.

But other than that, there is not anything specifically.

I mean, we -- as you know, I think everyone knows is that we work very hard to land toward the upper end of the range.

And we feel very good about our businesses as we turn the page to the second half of the year.

We feel great about our pipeline.

We expect to have another good bookings quarter in the third quarter.

And we're going to work hard every day to try to land at the upper end of the range and that would be a good result.

Okay.

Can you comment on where that inorganic was for the quarter?

And then on the Interactive business, we've seen the challenges demonstrated by traditional agencies with marketing spend evolving.

What do you think is the biggest difference in your model that's enabling your stronger relative growth?

I'll comment briefly on inorganic, and then I'm going to let Pierre pick up on the second.

Previously, we had said 2.5% to 3% for inorganic.

And I would say, now we're looking at more like 2.5%.

So really it's 2.5% for the year I'm referring to.

Yes, so let me take on -- on Accenture Interactive, and I clearly understand your question.

When you look in the typical business of the agencies, there are things we are competing against and things we are not doing at all.

And the things we are not doing at all is -- all is -- in this buying business you have in the agencies, and this business is trending down significantly, as we all know.

So we are not in this typical part of the business.

Where we are focused on is clearly, the high growth part of this digital marketing of environment where, what we're calling, brand mix creativity enabled by technology.

This is the sweet spot we decided to invest in, and we benefit from the investment.

Second is, we are certainly one of the very few, if not unique, to provide a full range of services against our mentality of end-to-end from design to production services to commerce services to analytic services, and now we're launching intelligent marketing services.

So we have these full range of technologies from experience to enabling the customer to wand magic of marketing in digital, but as well with the physical experience what we now calling the physical, the combination of physical and digital.

And three, it's just the leverage of the full scale and footprint of Accenture.

Just bear in mind, we are among the very few, if you compare to any of our competitors, to operate in more than 50 markets or 50 countries.

We are covering more than 15 industries, I guess, 19.

So when you look at the depth and breadth of our footprint, we have the opportunity to grow in much more industries and in much more markets bringing these end-to-end capabilities, highly differentiated and targeted in high-growth areas.

Proof point, take Fjord as an illustration, we acquired now 3 or 4 years ago, with around 150 people, maybe 160.

Now there are more than thousand people creating the largest experience agency in the world.

This is the leverage which is provided by Accenture and this leverage opportunity is absolutely second to none in the marketplace.

Next question comes from Brian Essex with Morgan Stanley.

Nice strong growth.

Thank you.

I was wondering, first of all, if I could dig in your conversation with Tien-tsin, just on health and public services, the contracts that were signed at lower profitability rates.

Was there anything in the quarter that was maybe onetime in nature in terms of upfront costs that give you confidence and better profitability on a run-rate basis?

Or maybe a little bit of color on those just to give us confidence on margin expansion going forward?

Yes.

I don't think there is -- there is not anything onetime in nature that would be, I think, appropriate to call-out on this call.

I mean, there's -- in a big operating group, there are lot of things in the mix.

And I would tell you that we have a very, very strong leadership team led by Dan London in our H&PS operating group.

And they are very diligently focusing on both driving the strategy and the growth agenda, but also our profitability agenda.

And I have confidence that the trajectory for H&PS in the second half of the year is going to be positive trajectory.

They're working all levers that we normally focus on, which is our -- everything from our pricing to our cost of delivery through to the efficiency and effectiveness of our sales and marketing cost, our investments, et cetera.

And I think, they get the levers at their disposal to navigate a -- an improving trajectory.

Got it.

That's helpful.

And then maybe on the Financial Services, you continue to outpace your peers with some pretty strong constant-currency growth there.

Looks like more European focused.

Maybe a little bit of color in terms of conversations that you're having with your customers and budget outlook for the remainder of the year and an outlook for ongoing strong growth in that segment?

Yes, of course.

I think, frankly, Financial Services, by and large, if you look these last years, has been strong.

It is an industry.

I mean despite all the halo effects around that industry, it's an industry which is still investing a lot in technology because Financial Services is all about tech.

And they have to invest if they want to stay relevant.

Now you have some very specific areas of growth.

I'm thinking about risk and regulatory management.

You know what's happening in financial services.

There is a lot on regulatory requirements across the world, especially in Europe.

We have the Basel II, the Basel III, the -- I mean, in insurance, the solvency, in capital market, they have their own regulation as well.

And then you have all the risk management, which is a very hot place in Financial Services for all the reasons we know.

So it's creating a significant market, so all what we call -- we are calling R&R, risk and regulatory management.

Of course, the other part is all is related to omni-channel management.

In Financial Services and in banking, you need now have an omni-channel architecture with your physical branches where you're adding your digital capabilities.

And all of this should create a seamless customer experience, all of this has to be built.

So you need a lot of strategic work to create this experience architecture and then, you need to build the digital platforms, and all "the New" related processes.

And maybe three, is data.

Financial Services is an industry where you are mining tons of data, tons of information.

And all this concept for the banks mining their own data, I'm talking about the data of the banks, to find new business models that could create value is very important.

So the activity there, you mentioned Europe rightfully, because in Europe -- it's true in the U.S. but it's very true in Europe, the retail business is pretty different because the interest rate are pretty low.

So when your interest rate are pretty lower, you're not delivering the same profit in your core business, the retail business.

So you need to do something in order to uplift your growth and to improve our margin.

So Financial Services is under pressure.

But again, it's like the other businesses.

They are under pressure, so they are looking for new capabilities, new business model, and this is where we positioned our services.

Next question comes from Darrin Peller with Barclays.

Good morning, Darrin.

Darrin?

Hello, Darrin?

Sounds like he had bad connection as soon as he -- you want to go to the next one and...

You can hear me better now or?

Yes.

We can hear you.

Yes, we've got you.

Just on the (inaudible).

Darrin, we cannot hear you, actually.

You're breaking you on us.

Karen, why don't we go to the next caller, please.

The next question is from David Koning with Baird.

I guess, my first question, just the other expense line, the $44 million-or-so in Q2.

How is that supposed to look in the future?

And what exactly is that, again?

That is primarily FX hedging losses.

This is essentially what is driving that this year.

We have 2 types of hedging we do.

We hedge certain balance sheet items to hedge against intercompany movement of cash and transactions.

And then the other hedging program, of course, is on our GDN.

But there are some balance sheet items that we don't hedge.

Some of those are unhedged losses, if you will.

But then even for our hedging programs, at times, the hedging programs can result in hedging gains or losses for our operating income.

So that's all in the mix.

I mean, the simple answer is, it's all related to hedging losses this quarter and that can vary quarter-to-quarter.

Okay, okay.

And all that's accounted for, the important point, in our EPS guidance.

Got you.

Great.

And then just one follow-up.

The acquisition spending, the last 2 quarters has been less than it had been in several prior quarters.

Is there the expectation that, that kind of ramps back up in the back half?

We think it'll be stronger in the back half of the year.

But we think we're -- we could land a bit lower than $1 billion for the full year.

Next question is from Arvind Ramnani with KeyBanc.

Can you talk about the nature of conversations on some of the newer areas such as AI and blockchain, including the scope and size of these projects?

With great pleasure.

I mean, it's indeed, we -- as I said before, if you are looking at Accenture, it's called "the New" and the new, new.

And I encourage all of you, and I will mention that in few minutes to participate to the IR Day, because we will reveal a lot about the new, new, and what next.

So I'm going to give to you some flavor on the blockchain, on the artificial intelligence.

On the blockchain, we have more and more projects.

And again, what we see is, we're starting to move from typically prototypes and proof-of-concept, the famous PoC, to project we're starting to get some scale.

We're not yet there.

But I think, we're starting to see what's most important with blockchain, what are the relevant areas where blockchain could create value.

And that's what we are doing in our labs.

This is what we are doing with co-innovation with our partners.

When you have a new technology, the big question is, how you create business and value out of this new tech?

This is what we are doing currently with accounts of several bank in Singapore.

This is what we've been doing -- so it's in the banking environment, where we see a lot of application of blockchain.

Capital market as well.

This is what we are doing with the exchange in Australia.

Very recently, we announced new opportunities and -- in the shipping industry with a subsidiary of CMA CGM, which is one of the largest shipping company in the world, in the contract management.

So we see the payment, we see the transaction exchange, and we see a lot around document and contract management.

That's what we're starting to explore is as well around tracking and full security, or security in tracking the supply chain.

So payment, transaction exchange, contract management, tracking of the supply chain, these are kind of 4 applied opportunity on the blockchain.

On artificial intelligence, probably, would take 2 days to mention all the opportunities we see in applying the artificial intelligence across the globe.

But clearly, the way we look at it, because we are absolutely obsessed by applying technology to create value and not choosing this as a kind of growth and high swings, where at the end of the day, you don't know exactly what to do with it.

So that's why we call applied intelligence and not artificial intelligence unit.

Pushing the people to deliver value to our clients with deep agility.

Today, we are really focusing around analytics plus machine learning, and then you're putting the algorithmic of artificial intelligence on top of it.

It's playing a lot with data.

It's playing a lot in the manufacturing industry where now you have tons of sensors where you can mine the data and do things such as predictive maintenance, just to mention one of an obvious application.

But we see a lot of artificial intelligence in the predictive business.

Massive application in healthcare and life science.

Couldn't be more pleased with the partnership we made with Roche in the cancer research, when we are working on they have, which is called a tumor board, where we are indeed bringing machine learning and algorithmic artificial intelligence to improve cancer diagnosis and of course, recommendation for that patient.

I can speak forever, but I think we don't have time, Angie.

Just a quick -- it was very helpful.

Just a quick follow-up.

When you think of this new, new, which includes this blockchain and AI, is the composition of work different?

Do you have a higher mix of product solutions?

Or do you a higher mix of consulting?

How is the nature of your work sort of different than the other stuff that you guys do?

Yes, I mean, it's always -- just saying, when you're starting something new, it's more rich, if you will, in term of services, in term of strategy, consulting and high-end tech.

That's the way you start.

And when this new businesses are starting to mature in the [X curve], if you will, then you're adding more of the -- I mean, delivery services, more of the operation services, coming behind.

Take security services, for instance.

We started with security strategy, identity, cyber threat, and we added managed security services.

So the new, new is clearly more around the high-end tech, high-end consulting to bring the industry expertise.

And this is what we see with -- I mean, to mention, the 3 new, new, and you will know more again at the IR Day, I'm doing a bit of advertising for the IR Day, around immersive realities, blockchain technologies and artificial intelligence and security services.

So it's more on the consulting/high-end tech.

The next question comes from Rod Bourgeois with DeepDive Equity Research.

Couple questions on the margin.

Congrats on the revenue side.

What's the trend in contract profitability in both consulting and outsourcing outside of the H&PS vertical?

Sequentially, the trend is an improvement.

And we expect sequentially the trend to continue to improve throughout the rest of the year.

I mean, we're always focused on contract profitability.

No matter what the result, we always want it to be better than it was and that is certainly true in the second quarter.

But sequentially, it was a moderately improving trend.

Got it.

And then can you give us, David, a little more color on the puts and takes on your margin performance in the first half of the year.

I mean, I'm specifically interested in the year-over-year impact of acquisition-related cost, but you've also got bonus accruals and pricing and other factors.

Can you call-out any sort of significant changes in year-to-year on those trends?

Yes.

So just -- so purely in the context of if you laid our first half results last year side-by-side with the first half results this year, really the 2 big impacts, and we always start with our segments, but the first big impact is H&PS.

And if you look at H&PS and if you were to look at the rest of the Accenture business absent H&PS in the first half of the year, absent H&PS, the rest of the Accenture business was flat in the first half of the year.

On the other hand, if you look at our inorganic, and if you were to look at the impact of inorganic in the P&L, and you look at this side-by-side, the underlying business, or let's say the organic part of Accenture, the margins would have expanded significantly in the first half of the year.

And of course, that is our whole model is to expand the underlying profitability in order to absorb investments.

And for the full year, delivering consistent operating margins is a -- again a reflection of that.

Got it..

So absent acquisitions, your margin expanded.

And then, I guess, on top of that, is there some added cost in the system because your growth accelerated?

Is that an added cost?

Or how do you look at that on -- in terms of its impact?

Not really.

I mean, there is -- we -- our business is growing rapidly, and we're constantly in the talent market bringing people onboard, and maybe there's a little friction cost there, but it's just normal business.

I mean, that's all within the space of kind of our normal supply-chain management and hiring activities.

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

The last question will be from Jason Kupferberg with Bank of America Merrill Lynch.

So just maybe one more on H&PS.

I just wanted get a better understanding of sort of what changed in the last quarter?

Because I know, you talked about some renewals, and then you talked about impact of acquisitions over the last 12 months.

Those just kind of sound like factors that we would have been aware of maybe a quarter ago that there was some pending renewals as well as the deals that were already done.

So maybe can you just walk us through what kind of changed as far as the underlying assumptions there that led us to where we are on the new outlook for full year margins?

Nothing materially changed for H&PS.

The explanation of H&PS is in the context of a year-over-year comparison in the context of what we had expected this year.

We had expected H&PS' profitability to be lower, and it's in the range of what we had expected.

Our change in margin outlook for the year is really a reflection of a conscious decision that we're making to create the right capacity to continue making investments in our business this year in order to continue to execute our strategy.

And to do that, while at the same time, generating significant returns to our shareholders with strong market-leading revenue growth, with double-digit EPS growth and strong really market-leading cash flow generation.

And so everything is in the context of driving significant value to our shareholders and having the right investment capacity to position our business for the long run.

Okay.

And just quickly for my follow-up.

Are there any more renewals than average across your business that you see during the balance of fiscal '18?

I know the pace of renewals can obviously vary quarter-to-quarter and year-to-year.

But is fiscal '18 a particularly high renewal year or no?

No, I don't think anything unusual in that regard.

All right.

So it's time to wrap up.

And thanks, again, for joining us today on this call.

I mean, just in closing, I mean, clearly, with the strong momentum in our business, our market-leading position in "the New", we feel very confident in our ability to continue gaining market share and driving value for clients, our people and our shareholders.

We really look forward to talking with you again next quarter, and also to seeing many of you in person in our Investor and Analyst Conference.

I'd mentioned many time in the call, in New York, on April 25.

In the meantime, if you have any questions, of course, please feel free to connect and call Angie and her team.

All the best.

Talk to you soon, and see you in New York.

Ladies and gentlemen, this conference will be available for replay after 10:30 a.m.

Eastern Time today through June 28.

You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 444873.

International participants dial (320) 365-3844.

That does conclude our conference for today.

Thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.