Q1 2006 Accenture Earnings Conference Call on …library.corporate-ir.net/library/12/129/129731/items/178343/Q1FY06... · Lehman Brothers - Analyst ... J.P. Morgan Chase & Co. - Analyst

F I N A L T R A N S C R I P T

ACN - Q1 2006 Accenture Earnings Conference Call

Event Date/Time: Jan. 05. 2006 / 4:30PM ET

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C O R P O R A T E P A R T I C I P A N T S

Carol MeyerAccenture - Managing Director IR

Bill GreenAccenture - CEO, Chairman of Exec. Leadership Team

Mike McGrathAccenture - CFO

Steve RohlederAccenture - COO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Greg GouldGoldman Sachs - Analyst

Rod BourgeoisSanford C. Bernstein & Company, Inc. - Analyst

Adam FrischUBS - Analyst

Moshe KatriSG Cowen & Co. - Analyst

David TogutMorgan Stanley Dean Witter - Analyst

Andrew SteinermanBear Stearns - Analyst

George PriceStifel Nicolaus - Analyst

Bryan KeanePrudential - Analyst

Lou MisciosciaLehman Brothers - Analyst

Brandt SakakeenyDeutsche Bank - Analyst

Tien-tsin HuangJ.P. Morgan Chase & Co. - Analyst

Ed CasoWachovia Securities - Analyst

Pat BurtonCitigroup - Analyst

Cindy ShawMoors & Cabot, Inc. - Analyst

Greg SmithMerrill Lynch - Analyst

Cynthia HoultonRBC Capital Markets - Analyst

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Jan. 05. 2006 / 4:30PM, ACN - Q1 2006 Accenture Earnings Conference Call


P R E S E N T A T I O N

Operator

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

Carol Meyer - Accenture - Managing Director IR

Thank you operator. And thanks, everyone, for joining us today for our first quarter fiscal year 2006 earnings announcement.With me this afternoon are Bill Green, our Chief Executive Officer, Mike McGrath, our Chief Financial Officer, and Steve Rohleder,our Chief Operating Officer. And I hope you've had an opportunity to review the news release we issued earlier this afternoon.Let me quickly give you the agenda for today's call. Bill will begin with an overview of our results. Mike will take you throughthe results in more detail. And Steve will add some operational perspective. Mike will then take you through our business outlookfor the second quarter and the full fiscal year. And Bill will provide a brief wrapup before we take questions.

As a reminder, when we discuss revenues during today's call, we are talking about revenues before reimbursements, or netrevenues. Some of the matters we will discuss on this call are forward-looking. And you should keep in mind that theseforward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differmaterially from those expressed or implied by such statements. Such risks and uncertainties include but are not limited to;general economic conditions and those factors set forth in today's press release and discussed under the "Risk Factors" portionof the Business Section of our annual report on Form 10-K and other filings with the SEC.

Accenture assumes no obligations to update this information presented on the call. And during our call today, we may referencecertain non-GAAP financial measures, which we believe provide useful information for investors. You can find reconciliationsof those measures to GAAP in today's news release and on the Investor Relations page of our Website at accenture.com. So letme turn the call over to Bill.

Bill Green - Accenture - CEO, Chairman of Exec. Leadership Team

Thank you, Carol. And let me first take the opportunity to wish everyone a very happy New Year. We had a great first quarterand are off to a terrific start in the new fiscal year. We achieved the highest quarterly revenues in Accenture's history andestablished new records for both consulting and outsourcing revenues.

We delivered $0.36 in earnings per share, a double digit increase over the first quarter of last year. We recorded 5.54 billion innew bookings for the quarter, our highest in seven quarters, with strong bookings in both consulting and outsourcing. Ourcontinued commitment to margin improvement enabled us to expand our operating margin by 90 basis points on an optionsadjusted basis. We maintained our strong balance sheet and generated 290 million in free cash flow. At the same time, wecontinued to return cash to shareholders. In the first quarter, we repurchased 52 million shares of our stock for a total 1.15billion. And we paid our first cash dividend.

The global demand for consulting and outsourcing is strong. Companies and governments around the world want to work withus because we have a well established track record and a proven ability to deliver results and to do so consistently. We remaincommitted to helping our clients build high performance businesses and committed to Accenture's high performance, continuingto build value for our shareholders. Accenture's ability to reach new levels of performance is a testament to our continued focus,both on execution for today and on ongoing relentless positioning of ourselves for the future.

We are just beginning; just beginning to see the yield from the convergence of several factors. Improving market conditions interms of demand and pricing, an unequalled set of client relationships and opportunities. A proven winning best in class set ofservice offerings, for winning within each growth platform, and winning across broad transformation programs. And at proven






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

Mike McGrath - Accenture - CFO

Thanks, Bill, and good afternoon. Q1 was a great quarter for us. It started with strong bookings and ended with a solid top andbottom line. Bill already give you the top line on bookings and Steve is going to provide more detail in his comments. So I'llwalk you through the income statement, balance sheet and cash flow and give you a little more detail behind the numbers.For the first quarter, net revenues were $4.17 billion, up 12% in both U.S. dollars and local currency, and at the upper end of ourexpected range of $4 to $4.2 billion.

Breaking that down by type of work. Consulting accounted for $2.58 billion, or 62% of total revenues. A year-over-year increaseof 8% in U.S. dollars and 9% in local currency. Outsourcing accounted for $1.59 billion or 38% of total revenues. An increase of18% in both U.S. dollars and local currency.

As we've said before, on September 1, we began expensing stock options and employee stock purchase plans. Given this, I'llbe taking you through the year-over-year comparisons using the options adjusted numbers for relevant metrics for the firstquarter of fiscal year 2005. This will provide a more meaningful apples to apples comparison. Full comparisons to GAAP figurescan be found in our news release and in the Financial Statements in the 10-Q that we will be filing in a few days.

With that in mind, let me take you through the rest of the income statement. Gross margin for the first quarter of fiscal 2006was 31.7%, compared with options adjusted gross margin of 31.8% for the first quarter of last year. SG&A costs for the firstquarter were $802 million, or 19.2% of net revenues. An improvement of 100 basis points compared with options adjustedSG&A of $752 million, or 20.2% of net revenues for the first quarter of fiscal 2005. GAAP operating income for the first quarterwas $513 million, or 12.3% of net revenues. Compared with options adjusted operating income in the first quarter of 2005 of$427 million, or 11.4% of net revenues. On this basis, operating income in the first quarter of this year increased 20% in dollarterms, and expended 90 basis points as a percentage of net revenues.

Our effective tax rate for the first quarter was 37.4%, consistent with our expected annual range of 35% to 38%. Income beforeminority interest for the first quarter was $328 million. Compared with options adjusted income before minority interest of$297 million for the same period last year. Diluted earnings per share for the quarter were $0.36, a year-over-year increase of20% on an options adjusted basis. We exceeded the top end of our expected EPS range by $0.02, with $0.01 due to the effectof our discounted share repurchases and redemptions during the quarter.

Now, let's look at our cash flow and balance sheet. For the first quarter, free cash flow, which is defined as operating cash flownet of property and equipment additions, was $290 million. This included operating cash flow of $368 million, less propertyand equipment additions of $78 million. Our business continues to generate significant cash flow. Our free cash flow yield wasapproximately 8% on a rolling fourth quarter basis, which was four times the average of the six companies in our proxy peergroup.

Our total cash balance at November 30, 2005 was $1.69 billion, compared with $2.27 billion at November 2004. Cash combinedwith $462 million of fixed income securities, classified as investments on our balance sheet was $2.15 billion at November 30,2005. Compared to a $3.21 billion at November 2004 and $3.18 billion as of August 2005. The decrease in cash was primarilydue to our share repurchases and dividend payment in the first quarter.

Total debt at November 30, 2005 was $54 million, down from $75 million at August 31. Our balance sheet and associated metricscontinue to be strong. On an options adjusted basis, our return on invested capital is 55%. Our return on equity was 60%, andour return on assets was 16%. Days services outstanding, or DSO's in the quarter were 47 days. In line with our target and downfrom 55 days in the first quarter last year and 49 days at the end of the fourth quarter.






Before I hand it off to Steve, let me cover a few things we did in the fourth quarter to meet our commitment to continue toreturn cash to shareholders. On November 15, we paid our first cash dividend of $0.30 per share. In the first quarter, we alsorepurchased 52.2 million shares for a total of $1.15 billion. As a reminder, 46.4 million of these shares were acquired at a discount.This includes 35.9 million SCA shares, as well as approximately 10.5 million limited shares acquired from former partners. As ofNovember 30, we had $1.3 billion of share repurchase authority remaining.

From time to time, I get questions about the size of our public float. Given our share repurchase activity in the first quarter, andusing what we believe to be the most conservative method of calculation, our public float is now approximately 54%. Now, letme turn the call over to Steve for some more detail on our operations.

Steve Rohleder - Accenture - COO

Thank you, Mike. And hello, everyone. I'm going to comment on the performance highlights of our operating groups andgeographic regions. Cover some of our standard business metrics and key operational drivers. And then I'll turn it back to Mikefor the business outlook. In the first quarter, all five of our operating groups achieved revenue growth in both U.S. dollars andlocal currency. Products, resources and government fueled this growth, with each achieving double digit revenue increases.

Products turned in a strong performance, growing revenues 18% in U.S. dollars and 19% in local currency, and exceeding $1billion in revenue for the first time in any quarter. The revenue increase was primarily due to strong growth in the Americasregion, mostly in our health and life sciences and retail industry groups. In resources, revenues grew 15% in U.S. dollars and14% in local currency, due mainly to strong performance in chemicals, energy and natural resources.

We continue to see demand from the energy supermajors for systems integrations services. Our government operating groupgrew 14% in U.S. dollars and 15% in local currency. This growth was driven by outsourcing, primarily in the Americas andAsia-Pacific regions. Communications in high tech, with revenues of 1.05 billion for the first quarter, continues to be our largestoperating group. Growth of 8% in both U.S. dollars and local currency was driven largely by the Americas and EMEA regions.

In financial services, revenues increased 6% in U.S. dollars and 7% in local currency. While the results in financial services werelower than our expectations, our asset-based strategy is gaining momentum. A great example, is the work we're doing to helpChina Minsheng Bank build a world class core banking system. China Minsheng Bank is the first privately owned nationwidecommercial bank in China.

Now, looking at our geographic regions. In the first quarter, all three regions grew revenue in both U.S. dollars and local currency.With the Americas and Asia-Pacific turning in double digit revenue growth in both U.S. dollars and local currency. In the Americas,revenues grew 19% in U.S. dollars and 18% in local currency, with strong growth in both consulting and outsourcing. While thebiggest contribution in absolute dollar terms came from the United States, all countries in the regions delivered solid growth.Revenue in our Europe, Middle East and Africa, or EMEA region, grew 5% in U.S. dollars and 7% in local currency. Driven primarilyby growth in France, Germany, Italy and Spain. And revenues in Asia-Pacific increased 14% in U.S. dollars and 13% in localcurrency. And at 303 million, set a new quarterly record.

New bookings were a great story again this quarter. At 5.54 billion, new bookings were the highest in seven quarters. We werepleased that consulting bookings increased 41% year-over-year, accounting for 2.78 billion of total new bookings for the quarter.Outsourcing accounted for 2.76 billion of new bookings, a 34% year-over-year increase, and evidence that our BPO andapplications outsourcing strategy are taking hold. We're pleased with both the quality and the size of the contracts that weresigned.

The 5.54 billion in new bookings is even more impressive because it was achieved without signing any mega contracts. Ourpipeline is also up sequentially and I feel very good about the quality of the opportunities we have in the pipeline. We've seen






some modest improvement in pricing, which allowed us to absorb the September 1 payroll increases and maintain our contractmargins. And we continue to drive for premium pricing in our consulting work.

Now, let me give you a quick update on three operational drivers that give us even more opportunity to improve our performance.Managing our people, reducing SG&A, and leveraging our global delivery network. Head count at the end of the first quarterwas about 126,500 and we expect to end the year at more than 140,000 people. Attrition was just under 19%, a slight uptickover the prior quarter, but in line with our target levels and below the attrition rate for the first quarter last year.

Utilization was 82%, making this the 11th consecutive quarter that we've had utilization above 80%. We continue to focus onimproving our cost structure and reducing SG&A costs as a percentage of net revenues. On an option adjusted basis, we had100 basis point improvement in the first quarter and continue to target 100 basis point improvement for the full fiscal year. Inthe first quarter, we grew the global delivery network head count to 38,000 people.

We grew head count in India, the Philippines and China. But had the strongest head count growth in our centers in Latin Americaand Eastern Europe. We expect to be at 50,000 people in the global delivery network by the end of this fiscal year. Overall, we'repleased with the progress we're making in key operational areas, as we continue to focus on operational excellence, expandingmargins and driving profitable growth. Now, let me turn it back over to Mike for some of our business outlook.


Thanks, Steve. Turning now to our business outlook. For the second quarter, we expect revenues to be in the range of $4 to$4.15 billion. This range assumes negative FX impact of 3% to 5% for the quarter. We expect diluted EPS for the second quarterto be in the range of $0.33 to $0.35. Now, looking at the full fiscal year, we continue to expect net revenue growth in the rangeof 9% to 12% in local currency. Given the discounted share repurchases and redemptions in the first quarter, we've adjustedupward our expectations for our full year EPS by $0.07.

We now expect GAAP diluted earnings per share for fiscal year 2006 to be in the range of $1.52 to $1.57. This range represents19% to 23% growth over the comparable 2005 options adjusted baseline, which is as a reminder is $1.28. Also for the full fiscalyear, we continue to expect operating cash flow to be in the range of $2 to $2.2 billion. Property and equipment additions tobe $450 million, and free cash flow to be in the range of $1.55 to $1.75 billion.

We continue to expect our 2006 operating margin to be in the range of 12% to 12.5% for the full fiscal year. This represents ayear-over-year margin expansion of 40 to 90 basis points. As a reminder this, is an annual target, so expect there to be somefluctuation from quarter to quarter. We continue to expect the annual effective tax rate to be in the range of 35% to 38%. Andwe are still targeting new bookings in the range of $19 to $21 billion for the year. Let me turn it back to Bill.


Thank you, Mike. Before we open it up for questions, let me talk about the accelerated momentum that we're beginning to seeand what we're doing to drive our performance to increasingly higher levels. First, our global delivery network; at 38,000 people,we have the scale, maturity and a weapon for both offense and defense. Our applications outsourcing strategy; we're addingsales directors, we're driving new sales campaigns and we have a streamlined contracting process.

Our BPO capability; we have a solid back bone and are winning in each area across the BPO functional spectrum, as well as inthe rapidly growing multitower procurements. Our quality and process excellence program is giving us additional leverage.Our asset base strategy gives us new leverage by capturing our distinctive industry and functional knowledge for repeatabilityand reuse on a global basis. Our new products and services are giving us powerful, distinctive new offerings to expand our coreconsulting business. And finally, we are increasingly selective in the assignments we take.






All of this translates into higher sustainable levels of growth, earnings, and cash flow. One of our objectives is to be a goodinvestment for our internal and external shareholders. We believe we are just starting to see the yield from the combination ofour exceptional market position, our strategy, and the activity and momentum that is currently in the marketplace. Now, let'stake some questions.

Q U E S T I O N S A N D A N S W E R S


Okay. Thanks, Bill. We would like to give as many people as possible an opportunity to ask questions. So just like last time, ifyou would, please, we would appreciate it if you could limit yourself to one question. And then if you have additional follow-upitems, you can circle back into the queue. All right, operator, I think we're ready, please.

Operator

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

Greg Gould - Goldman Sachs - Analyst

Thanks. I just wanted -- you guys are going to be surprised. I won't ask about bookings and pipeline. But I wanted to understanda little bit more; how much of this is economically driven versus -- and new tech cycle driven, the strength in bookings? And itseems like the bias to bookings to that 19 to 21 billion target is to the upside, isn't it, given the strength in the first quarter? Andif the pipeline is up sequentially?


Greg, it's Steve Rohleder. First, to your first question, yes, it's hard to segregate how much of this is driven by the cyclical natureof the economic trends out there. I would tell you that the strength of the consulting bookings is really based on a couple ofthings. First of all, technology refreshment that's happening in the ERP area, and continued push in high value consulting,primarily in the strategy area and in the human performance area. So, you can kind of draw your own conclusions as to wherethat's coming from. Outsourcing, I think that there's a continued push to -- for cost reduction. I think that there's also a movetoward the -- our vertical and horizontal BPO's and we're seeing a takeup in the marketplace around that.


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


I would say yes. Generally speaking, small to mid-size deals. There aren't a significant number of mega deals out there. There'sa few. But I would say your characterization is correct.


Okay. Thank you. Terrific quarter.







Thanks.

Operator

Thank you. We'll go to the line of Rod Bourgeois with Sanford Bernstein. Please go ahead.

Rod Bourgeois - Sanford C. Bernstein & Company, Inc. - Analyst

Yes, guys. I wanted to talk a little bit about the cash flow. Your target is in the $1.7 billion range for the year. And I wanted tosee if you could give us some extra color on where the sort of uptick on your cash flow run rate will come from as the yearprogresses?


Well, our cash flow has always been cyclical with respect to quarters. The first quarter has been typically our lowest quarter,except over the last three quarters. So basically, the pattern we're looking at this year is the same as the pattern in the outquarters. That we continue to monitor the DSO thing and with the revenue run rate, the 1.55 to 1.75 was where we think we'llcome out.


Okay. That makes sense based on the history there. Just a follow-up on that. You mentioned that there was a payroll, or at leasta salary increase, I assume is what that means, as the fiscal year began. And that is sort of being offset by sort of pricing goingup. Can you give a little more color on how much the salary increase actually was? And what the sort of net price increase isthat you're actually seeing in the marketplace?


Well, I'll give you a sense. I think on the last earnings call, we had indicated, Rod, that from an overall standpoint, and you haveto average this across a number of countries and a number of our work forces. The average salary increase was about 6%, whichwas really about a 2% increase to our cost base. And that kind of gives you a sense of what we've been able to recoup.


Okay, that's great. The pricing, just to clarify, is the pricing power that you're seeing an apples-to-apples, or on like-for-like deals,or are you seeing like-for-like pricing going up and also a positive mix shift? Can you break it down that way?


Well, I wouldn't break it down that way. I would tell you that there are specific areas of our practice that we're continuing topursue a price premium. For example, in specific areas of our business consulting practice and in those areas that we havespecific assets that we can bring to bear to our clients. That gives us the pricing power with very unique solutions, very, verystrong skills that are in high demand. That allows us to command a premium and we're going to continue to push that.







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


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


No, really across the board, in the traditional consulting business, in the complex SI business, which has a mix of offshore usually,and in the outsourcing. I think the other thing I would point you to is the comment I made about the selectivity in being ableto choose some of the work that you go after.


Great. Thanks, guys.

Operator

Thank you. We'll go to the line of Adam Frisch with UBS. Please go ahead.

Adam Frisch - UBS - Analyst

Thanks, guys. You're coming off two very impressive quarters now and your outlook for Q2 is a little lighter than we expected.But the year is the same, if not higher in most metrics. Is there some seasonality here at play, or is the first shot at 2Q specificsjust a conservative look?


Well, Q2 is always a down quarter relative to the other three. This year we have the vacation effect. We have a significant FXhead wind, we think coming at us. It's a little bit hard to judge. We have to make guess work there. And basically, it's just areflection of the seasonality of the business more so than anything else.


Okay. And just a quick follow-up. In the consulting bookings, obviously a very impressive number. Anything, any big chunkystuff in there from outsourcing deals, or was it mostly things that are more traditional in nature, like your basic singles anddoubles and there was just a lot of hits this quarter?


Adam, it's Steve. More the latter. It was singles and doubles that came in in big volumes.







Okay. Okay. Great job, guys.


Thanks.

Operator

Thank you. We'll go to the line of Moshe Katri with SG Cowen. Please go ahead.

Moshe Katri - SG Cowen & Co. - Analyst

Thanks, and great quarter. Is there a way to quantify the bookings of what you guys called last quarter offshore-like servicesand think the number was about $200 million? And then is there any way also to break down the booking growth by applicationoutsourcing and BPO for the quarter? Thanks.


Moshe, it's Steve. We've not started to separate out our application outsourcing. Bill has mentioned that we've got the initiativeunderway with the business development directors. We're continuing to push the growth. But quite frankly, we've not gottenthat granular because it is mixed in with some of our other systems integration work. We do see a higher demand for offshoreusage and we see that across all five of our operating groups. But to put a specific number on it would probably be incorrectright now.


Okay, but, again, you did specify a number last quarter. I think you said $200 million in bookings.


I tell you why that was easy to do, because we had run a specific pilot in financial services that allowed us to isolate that numbervery effectively. It's now grown, as we've scaled this program across all of our OG's and we haven't measured it individually.


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


I don't have that with me and frankly, I don't -- I can tell you that, from an overall standpoint -- you heard me talk about thenumbers. The U.S. was in the high teens and frankly, that's what we've targeted. We've targeted double digit growth for theyear. But I haven't broken it consulting and outsourcing.







Yes, Moshe, this is Bill. Steve has been -- had this grow America program under his watch. And the thing is really starting toyield. And we're just delighted with the progress that we see in the North America, particularly the United States. And delightedwith the pipeline we see there as well.


Great. Thanks.

Operator

Thank you. We'll go to the line of David Togut with Morgan Stanley. Please go ahead.

David Togut - Morgan Stanley Dean Witter - Analyst

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


Well, again, our objective for the year is 100 basis point improvement for the year, which we did for the quarter. We've had aplan -- a program in place for the last few quarters to try and fundamentally disconnect the growth rate of SG&A from the growthrate in revenue. That's comprised of some absolute cost take-out. But more so, it's comprised of being able to leverage the samecost base across a higher revenue run rate. An example would be the SAP system we put in last year. We've now got thatembedded and that allows to us do some things we couldn't do on the old model because we had to add people every timewe seemed to add revenue. We're moving more of our back office functions offshore. That's still in its early days but that'sbeginning to take place. And then thirdly, we're just have an overall push on the efficiency, if you will in, terms of how we operatethe place. So basically it's good old fashion management 101 in terms of how we're attacking it.


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


We're continuing the implementation per the schedule that we've laid out, David. We're -- the contract is going well. Other thanthat, I really don't want to make any comments. As you can recall last time we talked about including the forecast for NHS inour guidance and there hasn't been any change from that.


Okay. Thank you.


You bet.






Operator

Thank you. We'll go to the line of Andrew Steinerman with Bear Stearns. Please go ahead.

Andrew Steinerman - Bear Stearns - Analyst

Good afternoon, gentlemen. I wanted a quick thought on your -- the last couple of quarters, this and last quarter, we've sort ofskidded back to high single digit growth after a year of double digit growth. And most recently, we've heard good things aboutthe European economies for the first time. How do you look at the strong bookings overall as it applies to Europe?


Let me start and Bill may want to add something in here. Our business in Western Europe, as I commented on, Andrew, is verystrong. France, Germany, Italy all had double digit growth. And we're continuing to see the strength there. I believe we're takingmarket share in both consulting and outsourcing. We are seeing the outsourcing market begin to pick up both from an applicationoutsourcing, IT outsourcing, and BPO standpoint. So, I think some of the trends that we've observed in the U.S. and NorthAmerica have now spread into Western Europe and we're poised to take advantage of that. So, I think we're seeing stronggrowth there and we're seeing a strong pipeline.


Yes, I would just add Andrew, I spent a lot of time over there and I think, right now if you look at the Latin countries, which we'vealways been waiting for a slowdown, they continue to just do great. Germany, as Steve mentioned, is doing fantastic and that'ssomething that we're really pleased with. The UK, which grew like a weed the last couple of years, is shaking itself out, absorbinga lot of the demand. We're moving some people from country to country right now over Europe, which as you know, is sort ofwhat we do routinely. And yes we think that Europe will come back and be consistent with where it has been historically forus.


And did bookings look good in Europe?


Yes. No, bookings looked fine in Europe. And the opportunity -- I think more importantly to me, Andrew, is the opportunitieslook great in Europe.


Thanks for the color. Thank you.

Operator

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






George Price - Stifel Nicolaus - Analyst

Thanks very much. Just to follow up on that last question, what was the growth in the UK? You mentioned the four on thecontinent were all double digit. What did the UK do?


Well we don't look at the growth of the pieces per se other than casually, because it's not how we run the railroad. For instance,we've had thousands of people shift into the UK over the past year. And now some of those people we're moving back to coverthe demand in Italy and Spain and those other places. So -- but I think in the UK to be perfectly honest about it, we've beendigesting a lot of the work that we had sold the last couple years and we're moving some people around. The UK continues tobe our third largest country in terms of people and our second largest country in terms of total business volume and activity.


Okay, and just a couple questions related to offshore. First, what was India in the quarter? I didn't hear if you gave a number interms of people. And how do you expect that to move through the year relative to your overall global delivery target? And thenwhat's the -- maybe a status update on where you're moving more of your back office functions to India? Update on that, thanks.


Yes, the total in India for the quarter, I think we finished the quarter about 16,500, George. And in terms of projections, wehaven't split out, other than a total number, country by country within the global delivery network. I would tell you in terms ofour back office operations, it varies by function. So for example, our HR function, we've moved some of our operations intoIndia. We're probably going to be moving some of our -- a little bit more operations to India. In our finance function, we'reactually moving some of that offshore to Brazil. So it varies by country, and I'm -- Argentina, to be exact. And I just wanted to --I'm happy with the progress that we're making. I think it's going to take multiple quarters to get us through this, so we've justscratched the surface, frankly.


Great, thank you.

Operator

Thank you. We'll go to the line of Bryan Keane with Prudential. Please go ahead.

Bryan Keane - Prudential - Analyst

Great start with the fiscal year. Bill, you mentioned demand in pricing, that environment improving. In particular, pricing, areyou really starting to see some pricing leverage kind of going forward that you can actually price deals a little higher than youhave, let's say, last fiscal year?


Well, we're always very careful on this particular point and we've been staying stable for a long time. And when we look atpricing, the first thing about pricing is to be able to absorb the payroll increases that we have every year. And that has been






important for us. Now, what we're looking at -- and I think we mentioned this last quarter, that certain services that we havethat we're trying to price on the more premium way. Which is more related to the value we can deliver and we have seen successat that. And then the third thing, which we look at, which is really important to Steve and I is we look at the inbound pricing onthe new work. And that's frankly, not boutique work. That's very traditional work and it's in outsourcing, it's in systems integrationand it's in consulting. And we have seen that book of business that we signed in this quarter have improved pricing across theboard -- across thousands of contracts frankly, than we've ever had before. So we are feeling, I would say, Bryan, more optimisticabout pricing than we have for a long, long time. First step for us is maintain the margins, absorb the payroll increases. Andthen the next step is being able to take some of that and bring it to the bottom line and that's what we're working on.


Okay. And then on the offshore side, I want to ask that question a little differently. At the analyst day, I think you guys weretalking about taking an offensive attack towards offshore outsourcing and even competing head to head with some pureoffshore deals against some of the tier one Indian firms. Has Accenture had any success to report on this strategy of just goingafter the peer offshore pieces of business? Yes, we sure have, Bryan.


In fact, there's a specific example in my home state that we went head to head with MphasiS, Wipro and TCS and beat them ina straight application outsourcing deal. So we've seen examples now, not only in financial services, but in resources and ourother operating groups, where we've gone head to head, we're price competitive, we're maintaining and expanding our marginswith proposals that we're putting on the table and we're winning the work.


Okay. That's great. And then finally, Mike, option expense, it looked like it was $0.02 in the quarter. I guess I was expecting morelike $0.04. Should $0.02 be the right number going forward per quarter?


Well, we're reporting GAAP earnings for this fiscal year as the earnings fall. And we're trying to restate last year to be able togive you an apples-to-apples comparison on what it would have been had we expensed options last year. As we told, I think atthe last time I spoke the because of this FAS 123R, we changed a lot of our old option based programs into our shoe-basedprograms and therefore there is no longer sort of an apples-to-apples real comparison of how much option expense might bein this fiscal year. What I did say is that our total equity expense year-on-year is about the same.


Okay, great. Thanks, guys.

Operator

Thank you. We'll go to the line of Lou Miscioscia with Lehman Brothers. Please go ahead.






Lou Miscioscia - Lehman Brothers - Analyst

Okay, thank you. I was wondering if you could maybe go back and comment one more time about the U.S. and Europe? Maybefrom the respect of IT budgets in the sense of how much growth is actually Accenture actually getting from just IT budgetsincreasing on a year-over-year basis? Maybe give us a projection if you could on the geographies for '06 and how much of itjust sounds like just share gain?


Lou, I don't -- I would sit here today, and it has never entered my mind about sort of increasing IT budgets. And I mean a lot ofthis work, we've had in our pipeline for three months, six months, some of it 12 months probably. A long time we've beenworking on these opportunities. And I think that's important because we do see a lot more activity in the technology spendingbut it's a lot more recent than the opportunities that we have been pursuing today. We are hopeful that that opportunity wesee today in tech spending is going to serve us very well in the quarters to come and we hope to be well positioned to do that.But I frankly, don't make the connection because I've -- Steve and I have both worked through the sales cycles on certainly manyof the larger ones. And these started way back before people started spending more money and before we got into the currentbudget cycles that we're in now with the companies.

As it relates to the geographies, in all honesty, you put your mind on something, you focus on something, you can profit improveit. We did that with the United States. We did that with the Americas. We're seeing the yield the last several quarters. Europe,on balance, it is a thriving component of Accenture. It always has been and continues to be. Europe's hard because you movepeople across all these countries. And we run our business, as you know, through our five operating groups and not by country.

So, we tend not to look at it by country, but deploy those people where the demand is. So, that's what's going on right now.But in countries that have been super hot, like Italy and Spain, for years, they continue to grow at a double digit pace anddramatically ahead of the rest of the market. I think broadly, we see the business activity in Europe to be very strong.


Okay. Quick follow-up. I guess when you look at such a nice booking number in the first quarter, would you expect it to be --and obviously we always know it's choppy. Would you expect it to be fairly linear throughout the year or would you expect thatsecond quarter as per the comments earlier, about revenues and seasonality might dip down somewhat?


Well, I guess I would say that we sat there and you ask yourself -- we don't intend to change our bookings guidance. That said,we feel great about the -- not only the bookings, but the, its components. Right? All the pieces that added up to the bookingnumber. And if you look at that and you look at our pipeline and you look at our win rate, you have to be pretty optimistic aboutthe bookings going forward.


Okay. Thank you. Good luck on the year.

Operator

Thank you. We'll go to the line of Brandt Sakakeeny with Deutsche Bank. Go ahead.






Brandt Sakakeeny - Deutsche Bank - Analyst

Thanks. Actually I'm all set. Congratulations on the quarter.


Thank you.

Operator

Thank you. We'll move on to the line of Tien-tsin Huang with J.P. Morgan. Please go ahead.

Tien-tsin Huang - J.P. Morgan Chase & Co. - Analyst

Thanks. Just a higher level question about the competitive landscape. There's a lot of talk in the marketplace about possiblelevered buyouts of some of your competitors. I was curious to know when you compete for contracts, how much of do yourperspective clients weigh the supposed financial condition of the partner? Like the level of leverage in an RP or a bake-off? Justcurious to know what your thoughts are there?


Yes, well I would tell you there has always been a price -- well, for the leading companies, for the leading clients, for the bigopportunities, there's always a price of admission. And the price of admission, is you're credible, you're durable, and you'regoing to be around forever. I mean if you can't pass that test, right, it's game over. Because these people are betting their jobsand their companies on what you're going to do for them. And there's no question about that. Certainly down market and forcertain components of work it's a little more helter skelter. But I do believe that if you look at our client relationships, where ourtop 100 clients, 80% of those we've had relationships with for 15 years. These people expect you to be there because what theyare looking for is a business advisor, a business partner, someone who will share risk. They are not looking for an opportunistwho is going to cash out when it's -- when it works for them. And so I think competitively, we pride ourselves on sort of whowe are and where we came from and on what we do. And we intend to stay the course on it because that's -- those are the kindof clients that hire Accenture for service.


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


I'm not sure I can do that justice on this call. But basically, we have set some fence posts in the ground. We've said that, we havea business that is run, we think, effectively, conservatively. We've set a general guideline around our cash balance to be somethingin the range of 1.5 months worth of revenue. We've set modest aspirations for M&A spend. We have an SG&A -- excuse me, aCapEx that is this year in the range of $450 million. We've committed to return cash to shareholders through both dividendsand repurchases and indicated over time we would expect to see a shift toward dividends. And we do not see ourselves takingon substantial leverage just for the sake of taking on substantial debt.







Okay. So what's the latest thinking quickly in terms of share repurchases? The last purchases were very shareholder friendly. Socurious to know if you have something similar in mind in the coming months or quarters?


As of the beginning of the fiscal year we had $1.7 billion of share repurchase authority represent main. I indicated that weintended, without specific plans, that we would probably use that authority over a period of 12 to 18 months and we are stillon that track.


Very good. Nice job guys. Thanks.

Operator

Thank you. We'll go to the line of Ed Caso with Wachovia Securities. Please go ahead.

Ed Caso - Wachovia Securities - Analyst

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


We benefit a great deal from the merger activity. As people know, if they followed our history, we have done many, if not all ofthe banking mergers through history. We've worked on a great deal of what's going on in telecommunications right now. Wehave a very distinct and specific part of our business, which is around post merger integration. And we have a proven trackrecord of being able to run clean rooms and operate. And most importantly, accelerate the merger benefits dramatically aheadof what a company or other competitors can do.

And as you know how these mergers go together, it's all based on savings and an economic profile. And what we have perfectedthrough our consulting team is how to go in there and drive out the most amount of benefits in the shortest amount of timeto have the best outcome. And so we have any number of merger integration projects underway right now. The interestingthing about those is they start out being very consulting intense. But as time goes on and you start integrating the back officesin the systems and the processes and the call centers, they become very technology intense.

Right now in certain industries, we're doing the wave that is very consulting intense. And I think downstream, it's a 10 or 20Xkind of multiple in terms of the kind of work you can do to help these companies with the hard nuts, integration of the all thesystems and processes and things they need to do to get right.


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







Yes, this is Steve. First of all, I think it's important to just give you some context with financial services last year. They are comingoff a real strong year, so they had a tough comparable in terms of growth. But that said, I would tell you that first of all, we'vegot a very strong pipeline of opportunities and strong bookings for financial services. I think what we're doing is, we'reexperiencing a temporary lull in utilization that is going to correct itself in Q2 and Q3 going forward. So, I don't see a systemicissue there.


Thank you. Congratulations.

Operator

Thank you. We'll go to the line of Pat Burton with Citigroup. Please go ahead.

Pat Burton - Citigroup - Analyst

Hi. Congratulations on the quarter.


Thank you, Pat.


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


Yes, I mean I think what we're still targeting, Pat, is growth in the 9% range. I suspect that if we see any change to that, we'llcome back and obviously update our guidance. But for right now, that's where we stand.


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


The weighted share number is 911 million, I believe. It's something like that. The 10-Q will be filed in a couple days and it willbe there, as will the ending share cut on the cover.


We can double check that for you, Pat.







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


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


Okay. Thank you.

Operator

Thank you. We'll go to the line of Cindy Shaw with Moors & Cabot. Please go ahead.

Cindy Shaw - Moors & Cabot, Inc. - Analyst

Thank you. Last quarter you mentioned on the call that you felt there was only one or more two quarters before some of thepricing power you've seen over the past year was fully reflected in the portfolio. But your comments at the beginning of today'scall suggest that there's actually a lot more room to run now from what you've seen over the last three months. Can you commenton that for us?


Cindy, this is Steve Rohleder. I think that certainly in this quarter, the pricing power that we experienced in Q4 and coming intoQ1, on the new bookings that we had, was strong enough to cover our payroll costs. And I think that's what you saw happen.I'll just reiterate, I still think that we have opportunities to expand our pricing in our specific consulting areas and in the use ofour -- the implementation of our asset strategy and we're going to continue to push that. We're also getting more selective, asBill mentioned, on the deals that we're going after to make sure that we can maintain and exceed our target margins forconsulting and outsourcing. So, we're aggressively looking to push premium pricing in the marketplace and we're going tocontinue to focus on it.


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


I think it will be fair. I think what you ought to focus on is the expansion that Mike mentioned in the operating margin. At theend of the day, that's what we're trying to focus on, pulling the levers from G&A, increased pricing, increased utilization, lowercosts to quality to contribute to the expansion at the operating margin level.







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


Yes. I think what we're seeing is industry acceptance of a couple of things. First of all, the deep industry skills that we bring inour consulting practice, as well as a real resurgence of our outsourcing capabilities, specifically in the BPO and applicationoutsourcing area. I think there's an understanding that we have the right skills, that we're bringing into market and we deliverwhat we say we're going to deliver. And that's contributed to our increase in win rates and to higher bookings numbers.


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


No, I would rather not.


Okay, great. Thanks very much, and nice quarter.

Operator

Thank you. We'll go to the line of Greg Smith with Merrill Lynch. Please go ahead.

Greg Smith - Merrill Lynch - Analyst

Yes, hi guys. I think you said the overall attrition level is a little below 19%. Just first question is what is the level you're targeting?And is it possible to get the attrition just within the global delivery model versus the rest of the organization?


I won't break it out individually, because we look at it in the aggregate. I would tell you that traditionally, the first quarter hasbeen a bit higher, just because we have people going back to school, going on to other jobs. They have been given their annualbonus and they are moving on. So, I was really happy to see the level that we're at. And in terms of an overall target, we've takena position that we obviously want to improve it. We haven't set a specific target but we're striving to drive down that numberquarter on quarter. That's about all I would go forward with, Greg.


Okay. And then one quick follow-up. Just as you look at Western Europe, are you seeing any sweeping changes in the acceptanceof an offshore delivery model throughout western Europe?







Yes, the things that we are observing is that the offshore model there isn't necessarily -- and I'm talking specifically in theapplication outsourcing and BPO areas, isn't specifically to India, China, or the Philippines, but to Eastern Europe, Romania,Bratislava, some of the Eastern European countries that have a less of a language barrier. So, we're seeing acceptance from anoutsourcing standpoint in moving work to those areas, which has really fueled our growth in Eastern Europe.


Thanks a lot.


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

Operator

Thank you. And that will come from the line of Cynthia Houlton with RBC Capital Markets. Please go ahead.

Cynthia Houlton - RBC Capital Markets - Analyst

Hi. Thanks for taking my question. You talked about giving some numbers for billable heads in the low cost regions, both thisquarter and for the year. Could you help us segment out what percentage of those people are working on clients, Accentureclients, versus what percent are working on back office functions? And then maybe splitting the other way, which are more inkind of the consulting group, versus what percentage of folks are in outsourcing?


Cynthia, this is Steve. It's impossible to segment it out along the lines of what you have said. The lion's share, obviously arefocused on clients. And to split it in systems integration, application outsourcing, or BPO's is a more difficult task. The lion'sshare is a very high percentage of all of those people working in the offshore, global delivery network are focused on clientwork right now.


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


Yes, yes, it is.


And then just a quick follow-up. You talked a lot about the strength in the BPO. Could you -- a while back you were segmentingor giving a sense of what percentage of the outsourcing revenue. Could you give us a feel for either growth or kind of how tothink of the magnitude of that segment of the business?







Well, I won't quote specific percentages but I will tell you that we're continuing to see strength in the Accenture financial servicesarea. That is our fastest growing BPO unit. Followed closely by AHRS and learning and Accenture procurement services. Overall,our BPO revenue is up 25% for the quarter. I would also tell you that in our verticals, our Navitaire and our customer contact orCCT vertical is doing very well. So, those are two of the fastest growing verticals that we've got out there.


Thank you.


Okay. Well, thanks, everyone, for tuning in. Our continued strong performance demonstrates, in my mind, our ability to delivervalue to our clients and our shareholders consistently over time. Our theme of high performance delivered, and our provenability to help clients achieve high performance, are powerful differentiators for us in the marketplace. We continue to developand deliver solid top and bottom line growth, with double digit increases in both revenues and EPS in the quarter.

Our balance sheet remains strong and we are a cash generating machine. Bookings were great. Our pipelines expanded andwe see a modest improvement in pricing. The momentum in our business continues to build and I believe we're on a very solidtrajectory here.

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

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 9:45 p.m. Eastern Time today through MidnightJanuary 19, 2006. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and enteringthe access code 807195. International participants may dial 1-320-365-3844. Those numbers again are, 1-800-475-6701 and1-320-365-3844, and enter the access code 807195. That does conclude our conference for today. Thank you for your participationand for using AT&T executive teleconference. You may now disconnect.

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Cover PageCorporate ParticipantsCarol Meyer (4 Turns)Bill Green (14 Turns)Mike McGrath (18 Turns)Steve Rohleder (21 Turns)

Conference Call ParticipantsGreg Gould (3 Turns)Rod Bourgeois (5 Turns)Adam Frisch (3 Turns)Moshe Katri (4 Turns)David Togut (3 Turns)Andrew Steinerman (3 Turns)George Price (3 Turns)Bryan Keane (4 Turns)Lou Miscioscia (3 Turns)Brandt Sakakeeny (1 Turn)Tien-tsin Huang (4 Turns)Ed Caso (3 Turns)Pat Burton (5 Turns)Cindy Shaw (5 Turns)Greg Smith (3 Turns)Cynthia Houlton (4 Turns)

PRESENTATION1. Operator2. Carol Meyer3. Bill Green4. Mike McGrath5. Steve Rohleder6. Mike McGrath7. Bill Green

QUESTIONS AND ANSWERS1. Carol Meyer2. Operator3. Greg Gould4. Steve Rohleder5. Greg Gould6. Steve Rohleder7. Greg Gould8. Steve Rohleder9. Operator10. Rod Bourgeois11. Mike McGrath12. Rod Bourgeois13. Mike McGrath14. Rod Bourgeois15. Mike McGrath16. Bill Green17. Rod Bourgeois18. Bill Green19. Rod Bourgeois20. Operator21. Adam Frisch22. Mike McGrath23. Adam Frisch24. Steve Rohleder25. Adam Frisch26. Steve Rohleder27. Operator28. Moshe Katri29. Steve Rohleder30. Moshe Katri31. Steve Rohleder32. Moshe Katri33. Mike McGrath34. Bill Green35. Moshe Katri36. Operator37. David Togut38. Mike McGrath39. David Togut40. Steve Rohleder41. David Togut42. Mike McGrath43. Operator44. Andrew Steinerman45. Steve Rohleder46. Bill Green47. Andrew Steinerman48. Bill Green49. Andrew Steinerman50. Operator51. George Price52. Mike McGrath53. George Price54. Steve Rohleder55. George Price56. Operator57. Bryan Keane58. Bill Green59. Bryan Keane60. Steve Rohleder61. Bryan Keane62. Mike McGrath63. Bryan Keane64. Operator65. Lou Miscioscia66. Bill Green67. Lou Miscioscia68. Steve Rohleder69. Lou Miscioscia70. Operator71. Brandt Sakakeeny72. Bill Green73. Operator74. Tien-tsin Huang75. Bill Green76. Tien-tsin Huang77. Mike McGrath78. Tien-tsin Huang79. Mike McGrath80. Tien-tsin Huang81. Operator82. Ed Caso83. Mike McGrath84. Ed Caso85. Steve Rohleder86. Ed Caso87. Operator88. Pat Burton89. Bill Green90. Pat Burton91. Bill Green92. Pat Burton93. Mike McGrath94. Carol Meyer95. Pat Burton96. Mike McGrath97. Pat Burton98. Operator99. Cindy Shaw100. Steve Rohleder101. Cindy Shaw102. Steve Rohleder103. Cindy Shaw104. Steve Rohleder105. Cindy Shaw106. Steve Rohleder107. Cindy Shaw108. Operator109. Greg Smith110. Mike McGrath111. Greg Smith112. Mike McGrath113. Greg Smith114. Carol Meyer115. Operator116. Cynthia Houlton117. Steve Rohleder118. Cynthia Houlton119. Steve Rohleder120. Cynthia Houlton121. Steve Rohleder122. Cynthia Houlton123. Bill Green124. Operator

Disclaimer

Q1 2006 Accenture Earnings Conference Call on …library.corporate-ir.net/library/12/129/129731/items/178343/Q1FY06... · Lehman Brothers - Analyst ... J.P. Morgan Chase & Co. - Analyst

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