Ladies and gentlemen, good morning. Thank you for standing by and welcome to Accenture's second quarter fiscal 2014 earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. If you should require any assistance today, please press star followed by the zero and an AT&T operator will assist you. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Managing Director of Investor Relations, Ms. KC McClure . Please go ahead.
Thank you, Tom, and thanks everyone for joining us today on our second quarter fiscal 2014 earnings announcement. As Tom just mentioned, I'm KC McClure , Managing Director 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 then take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the second quarter. Pierre will then provide a brief update on our market positioning.
David will then provide our business outlook for the third quarter and full fiscal year 2014, and then we will 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 are forward-looking, including the business outlook. You should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements and that such statements are not a guarantee of our future performance.
Such risks and uncertainties include, but are not limited to, general economic conditions and those factors set forth in today's news release and discussed under the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. As a reminder, in Q2 of last year, our results included benefits from final determinations of prior year U.S. federal tax liabilities and a reduction in reorganization liabilities. We include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the investor relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now, let me turn the call over to Pierre.
Thank you, KC. Thanks everyone for joining us today. Our results for the second quarter were pretty much in line with our expectations. We achieved record new bookings, delivered revenues within our guiding range, and grew earnings per share while continuing to return substantial cash to our shareholders. Here are a few highlights. We delivered outstanding new bookings of more than $10 billion, including record consulting bookings of $4.6 billion and record outsourcing bookings of $5.5 billion. We generated revenues of $7.1 billion, a 3% increase in local currency and above the midpoint of our guiding range. Earnings per share were $1.03 compared to $1 on an adjusted basis in the second quarter last year. Operating margin was 13.3%, which is flat compared to the second quarter last year on an adjusted basis. Our balance sheet remains very strong, ending the quarter with a cash balance of $3.7 billion.
We continue to return cash to shareholders through share repurchases and dividends. Today, we announced a semiannual cash dividend of $0.93 per share, which will bring total dividend payments for the year to $1.86 per share, a 15% increase over last year. Overall, we are pleased with our result for the first half of fiscal year 2014 and are encouraged by our very strong bookings of nearly $19 billion year to date, which position us well for the second half. We have updated our business outlook for the full fiscal year, David will cover it later in the call. Over to you, David.
Thanks, Pierre. As always, it's great to have the opportunity to talk with you about our financial results and how we're positioned for the full year. Before I get into the detailed results for the quarter, let me start by providing a few overall highlights. Our second quarter results reflected some clear areas of strength, but also some areas where we expect to perform better in the second half of the year. The bright spot was clearly in our new bookings, where we posted $10.1 billion, setting new records in several areas of our business and providing further indication of how our differentiated capabilities are resonating with the market. Net revenues landed in the general zone that we expected with 3% local currency growth, slightly above the midpoint of our guided range.
On the profitability front, our operating margin for quarter two was flat with last year, resulting in 20 basis points of expansion for the first half of the year, solidly in our annual guidance range, does reflect pricing and cost pressures in certain areas of our business, which we're working hard to address. At the same time, we continue to invest at higher levels in our business and return a significant portion of our cash to our shareholders. All in all, quarter two was a solid quarter. With that, let's get to the numbers starting with new bookings. New bookings for the quarter were extremely strong at $10.1 billion, representing an all-time high. Consulting bookings were $4.6 billion with a book-to-bill of 1.2. Outsourcing bookings were $5.5 billion with a book-to-bill of 1.6. Looking further at our new bookings, there's several additional insights worth noting.
Consulting new bookings were the highest quarter on record, building on our strong consulting bookings performance in quarter one. We saw good demand in both systems integration and management consulting, with both posting book-to-bills above the upper end of our target range. Outsourcing bookings were also at an all-time high, driven by extremely strong record bookings in BPO, where the demand environment remains robust and where we saw particularly high demand for our finance and accounting offerings. Technology outsourcing bookings were a little lighter this quarter, following strong bookings performance in quarter one. From an operating group perspective, CMT and financial services were the primary drivers to our strong bookings performance, which further strengthens their position for higher growth in the second half of the year.
Finally, our results include 10 clients with bookings in excess of $100 million as we continue to be the business partner of choice for helping our clients tackle their largest, most complex projects. Turning now to revenues. Net revenues for the quarter were $7.13 billion, an increase of 1% in U.S. dollars and 3% in local currency, reflecting a negative 1.5% FX impact consistent with the assumption we provided in December. Consulting revenues for the quarter were $3.7 billion, down 1% in U.S. dollars and flat in local currency. Outsourcing revenues were $3.4 billion, up 4% in U.S. dollars and 5% in local currency. Let me give you some highlights from the operating groups this quarter. Financial services grew 5% in local currency with broad-based double-digit growth in capital markets, as well as continued strength in outsourcing overall.
We're very pleased with growth rates in both EMEA and Asia Pacific and continue to be focused on driving improved growth rates in North America. Once again, our products operating group delivered a very consistent level of growth, well above the Accenture average growth rate at 5% growth in quarter two. The revenue drivers were similar to last quarter, meaning we continued to see broad-based growth with positive growth in both consulting and outsourcing in all three geographic areas and in the majority of our industry segments. CMT returned to growth at 2% this quarter. We continue to see signs of positive momentum driven by demand for transformation-led, value-driven projects. Our efforts to focus the business on new growth areas continue. We're seeing the impact in strong consulting growth across all of our geographic regions.
The Americas region continues to be the primary driver of growth, especially in electronics and high tech. H&PS growth for the quarter was 1%. While we did signal some moderation in growth from quarter one, growth in the quarter was a little lower than we expected. Our health business continued to have strong growth, particularly in the Americas. Our public service business had a modest decline in the quarter as the environment in Europe continues to be challenging. Looking ahead, we expect a ramp-up in H&PS growth in the second half of the year, beginning with a significant uptick in quarter three. Resources growth was flat in quarter two. The energy business continues to be the real bright spot globally with double-digit growth. Cyclical challenges in natural resources continue to negatively impact the overall growth rate of our Resources business.
Having said that, we do still expect to have positive growth for the year. Before moving down the income statement, let me provide some overall context on the factors impacting our profitability this quarter. Specifically, our operating results for the quarter reflect lower contract profitability, primarily driven by pricing pressures and our challenge in absorbing higher payroll costs, and to a lesser extent, lower margins in the early stages of a few large contracts. At the same time, our results also reflect a higher level of investment in the quarter to build new capabilities, including strategic acquisitions aimed at enhancing our capabilities in key growth areas. While we have accrued a significant amount of variable compensation this year, we did accrue a lower amount in quarter two compared to the second quarter last year, which offset the factors previously mentioned.
This lower variable compensation expense reduced accrued payroll on the balance sheet and is the primary driver for the reduction in our free cash flow guidance for the year, which I'll cover later. To be clear, our profitability does vary quarter to quarter, and it's normal for us to have certain periods where we have areas of cost pressure which require intervention. As always, we understand the areas that need attention, and we're taking action at speed and with the rigor and discipline that our investors have come to expect. Now to the numbers. Gross margin for the quarter was 31.3% compared with 31.6% for the same period last year, down approximately 30 basis points. Sales and marketing expense for the quarter was 11.7% of net revenues, compared with 11.8% of net revenues for the second quarter last year, down about 10 basis points.
General and administrative expense was 6.2% of net revenues, compared with 6.5% of net revenues for the second quarter last year, down approximately 30 basis points. As a reminder, we had two unusual items that impacted certain metrics in quarter two of last year. The following comparisons exclude the impact and reflect adjusted results. Operating income was $951 million in the second quarter, reflecting a 13.3% operating margin equal to the adjusted operating margin for the same period last year. Our effective tax rate for the quarter was 24%. Compared with an adjusted tax rate of 24.8% for the second quarter last year. Net income was $722 million for the second quarter, compared with adjusted net income of $720 million for the same quarter last year. Diluted earnings per share were $1.03, compared with adjusted EPS of $1 in the second quarter last year, an increase of $0.03.
Turning to DSOs, our days services outstanding continue to be industry leading. They were 33 days, down slightly from 34 days last quarter. Free cash flow for the quarter was $216 million, resulting from cash generated by operating activities of $292 million, net of property and equipment additions of $76 million. Cash flows for the quarter and year to date have also been impacted by lower accrued variable compensation expense, which I previously noted. Moving to our level of cash. Our cash balance at February 28th was $3.7 billion, compared to $5.6 billion at August 31 last year. The current levels reflects the cash return to shareholders through repurchases and dividends, as well as the higher level of acquisitions we've made in the first half of this year. Moving to some other key operational metrics.
We ended the quarter with a global headcount of about 289,000 people, and we now have approximately 192,000 people in our Global Delivery Network. In quarter two, our utilization was 87%, consistent with last quarter and slightly down from quarter two last year. Attrition, which excludes involuntary terminations, was 12%, up approximately 1% from both quarter one and the same period last year. Lastly, we continue to expect that at least 60,000 people will join our company in fiscal 2014. Turning to our ongoing objective to return cash to shareholders. In the second quarter, we repurchased or redeemed approximately 9.2 million shares for $739 million at an average price of $80.40 per share. Year to date, we have purchased 18.9 million shares for approximately $1.5 billion at an average price of $77.25 per share. At February 28th, we had approximately $5.8 billion of share repurchase authority remaining.
As Pierre mentioned, our board of directors declared a dividend of $0.93 per share, representing a 15% increase over the dividend we paid in May last year. This dividend will be paid on May 15th, 2014. In summary, with the first half of the year behind us, we're generally where we expected to be at this point in time. We see definite signs of building momentum in the market and in many areas of our business, yet the environment continues to be challenging. We're focused on what we need to do to deliver the year. Our focus, as always, is to leverage our strong position in the marketplace to capture the growth potential we see and to proactively manage the operations of our business to maximize profit, cash generation, and our overall return to our shareholders. With that, let me turn it back to Pierre.
Thank you, David. At Accenture, we are extremely focused on executing our growth strategy. Our record new bookings for the second quarter and for the first half of the year demonstrate that our services remain highly differentiated and are clearly resonating with the needs of our clients. One of the things that truly sets Accenture apart is that we combine our capabilities across consulting, digital, technology, and business process outsourcing to deliver tangible results for our clients. Let me bring this to life with some key wins in the second quarter. We were selected by a global communications equipment company to provide HR, IT, and finance and accounting services as part of a multi-year business transformation that is expected to deliver cost savings of more than $1 billion.
We signed a long-term agreement with Monte dei Paschi di Siena, a large Italian bank, to provide finance and accounting, administration, and other back-office services as part of a strategic restructuring plan to enhance the bank's competitiveness in the marketplace. We were also selected by a high-tech leader in security systems to support the company's transformation across more than 90 countries. We will provide HR, finance and accounting, and procurement services, leveraging our recent Procurian acquisition to reduce costs and improve operational efficiency. I am personally very pleased that a few weeks ago, we announced a unique new business model with SAP that we believe is a true game changer in the industry. Through the newly formed Accenture and SAP Business Solutions Group, which includes dedicated experts from both companies, we will jointly develop integrated industry-specific and cloud-based solutions.
Our broad industry and technology capabilities have enabled us to build long and enduring client relationships with the world's leading companies. We continue to operate at the heart of our clients' businesses, especially when it comes to executing large-scale mission-critical programs that deliver tangible outcomes. For Schneider Electric , we designed, implemented, and deployed a Salesforce.com solution to more than 26,000 users in 100 countries, the largest Salesforce implementation in Europe. The new cloud-based solution has already delivered value by increasing cross-selling and account coverage by 20%. For Endesa, one of the world's largest electric power companies, we are supporting the rollout of more than 13 million smart meters in Spain. Through a multi-year business process outsourcing agreement, we are facilitating the expansion of smart metering operations and integrating existing billing systems and business processes.
For a global pharmaceutical company, we are arming sales reps with a variety of digital technologies across tablets, smartphones, and PCs, to deliver a personalized user experience to doctors in more than 200 countries. This new digital promotion and sales program has already delivered $15 million in savings. Turning now to the geographic dimension of our business. In the Americas, we grew revenues 4% in local currency, which is consistent with Q1. Growth was driven by the United States, and we are pleased that our business in Brazil is starting to turn the corner. In EMEA, revenues were flat in local currency compared to the second quarter last year. We are starting to see good pickup in growth in important countries such as Switzerland, the U.K., Italy, Germany, and France. In Asia Pacific, we grew revenues 4% in local currency, driven by continued strong growth in Japan.
Before I close, I want to share something I'm personally very proud of. You have often heard me speak about our Diamond clients, which are our largest client relationships, and increasing the number of Diamond clients is clearly a priority for us to drive more growth. I am pleased that we added 16 new Diamond clients in the first half of the fiscal year, which bring us to a net total of 138 Diamond clients, an all-time high. Before I hand back to David, I want to comment on the global economic environment, which frankly continues to be challenging, especially in the emerging markets. As you would expect, we are carefully monitoring the recent geopolitical developments in Eastern Europe, which are introducing an additional level of uncertainty in the marketplace.
That said, given our strong bookings year-to-date and the level of activity we are seeing, I continue to feel confident that we are well-positioned to drive more growth in the second half of the year. With that, I will turn it back to David, who will provide our business outlook for Q3 and the full fiscal year.
Thanks, Pierre. Let me now turn to our business outlook. Let me start by saying, based on where we are for the first half of the year, we've updated most of the metrics in our business outlook. For the third quarter of fiscal 2014, we expect revenues to be in the range of $7.4 billion-$7.65 billion. This assumes the impact of FX will be flat compared to the third quarter of fiscal 2013. For the full fiscal year 2014, based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in US dollars will be -0.5% compared to fiscal 2013.
With strong bookings in the first half of the year balanced with 3% revenue growth year to date, we now expect net revenue for the full fiscal 2014 to be in the range of 3%-6% growth in local currency. For the full fiscal year 2014, we now expect new bookings to be in the range of $33 billion-$36 billion. For operating margin, we continue to expect fiscal 2014 to be in the range of 14.3%-14.5%, a 10-30 basis point expansion over adjusted fiscal 2013 results. We now expect our annual effective tax rate to be in the range of 25.5%-26.5%. For earnings per share, we now expect full-year diluted EPS for fiscal 2014 to be in the range of $4.50-$4.62, or 7%-10% growth over adjusted fiscal 2013 results. Turning to cash flow.
We now expect operating cash flow to be in the range of $3.3 billion-$3.6 billion, with property and equipment additions remaining at approximately $400 million, and free cash flow now in the range of $2.9 billion-$3.2 billion. We've lowered our cash flow guidance to reflect our updated assumption that we will accrue lower variable compensation due to higher current year operational spending as compared to what we assumed in our original guidance range. Finally, we continue to expect to return at least $3.7 billion through dividends and share repurchases. We also now expect to reduce the weighted average diluted shares outstanding by approximately 3% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up so that we can take the questions. KC?
Thanks. I would ask that you each keep one question and a follow-up to allow as many participants as possible to ask a question. Tom, would you provide instructions for those on the call, please?
Ladies and gentlemen, if you wish to ask a question, please press star followed by the one. You'll hear a tone indicating that you've been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. Once again, for questions, please press star one at this time. Our first question today comes from the line of Tien-Tsin Huang representing J.P. Morgan. Please go ahead.
Great. Thanks so much. I want to first ask on the comment that you made on contract profitability and pricing pressure. Can you just elaborate there? It sounds like you're unable to pass along higher payroll costs, or maybe you were just seeing outright pricing pressure. Can you just elaborate in what areas? Thanks.
By the way, hello. Good to talk to you this morning. I would say that the dial is probably turned up a little bit since last quarter in terms of the pricing environment. There's a couple of factors that are worth noting. One is that the ongoing trend in vendor consolidation is influencing the pricing environment. Secondly, we have seen more pricing pressure, if you will, in certain areas, and in particular in the application services area where the environment competitive characteristics are such that price is becoming very prominent in the bidding process. That's kind of what we see on the pricing front.
We also have seen some pricing pressures on our existing book of business, what that means specifically, as you alluded to, is we're a little further behind where we had expected to be in terms of being able to pass cost rates through on our existing contracts. Those are the two dynamics that we saw in our second quarter results.
Understood. Makes sense. Just my follow-up, obviously, the bookings were very strong, high book-to-bill in consulting, which is great. Just curious on the revenue productivity or the revenue production, I guess, that came in the middle of the guidance after beating the last couple of quarters, if I remember that correctly. What are the biggest factors that changed in terms of revenue production this quarter?
By the way, I think last quarter we were at the upper end of the range.
Apologies.
I think one factor clearly is what we just talked about is the pricing both on new work and existing work, and then how that ultimately impacts the conversion to revenue. We do see a situation in consulting in particular, where from a volume standpoint, we're actually seeing very strong growth. In fact, I would say that our volume growth is where we expected, if not better. The pricing environment is impacting that such that we're getting the net result in our revenue growth in consulting in particular.
That's helpful. I appreciate it.
Thank you.
Our next question is from the line of Joseph Foresi with Janney. Please go ahead.
Hi. Just going back to pricing, could you help us reconcile, usually pricing competition is a indication of either a slowdown or a maturity, yet the bookings are really strong. Can you help us reconcile those two pieces?
Well, let me make a comment, and Pierre may have a few comments as well. I would say in this case to the contrary, the environment is actually quite strong. We feel very good about our pipeline, even with the conversion of such a large portion of our pipeline to bookings last quarter. The level of client discussions that are taking place and clients' willingness to contract work is actually quite strong. Having said that, if there is a common theme, and we've talked about this for several quarters now, clients are by and large focused on cost optimization. I think that is a trend that we see almost in every industry and every market around the world.
Clients are moving forward, driving the business forward, looking at investments that they need to make, but they're doing it with an eye towards being very cost-conscious in the contract and investments they're making in their business.
Yeah, no, without piling on David, this is exactly right. We see demand in the marketplace, definitely reflecting with our very strong bookings, both in consulting and outsourcing. We have excellent win rate as well. The main issue, and we're working on it, or challenge, if you will, more than an issue, because we're working on it, is more in application services. This business is highly competitive. Clients continue to be very mindful, thoughtful, good negotiators with procurement. It's putting some very specific pressure in that part of the business. Now, that being said, we have other parts of the business, and I'm thinking about Digital, for instance, in consulting, where the price are either stable or even we can pass the price. It's always the same pattern, if you will.
When you can differentiate and provide differentiated, innovative solution, you can keep your price stable or even improve your price. In the market, which is more like application services, less around innovation, if you will, even if we are working hard on it to differentiate, there is some price pressure because the competition is quite intense.
I'll just, without piling on, there's probably one other nugget which is worth noting is that the success that we've had with the larger transformational deals, we've actually seen very stable pricing on those large contracts that as a portfolio has met our expectations. We have seen, as I called out in my prepared comments, that on many of these contracts, the way they are structured, the profitability is a little lower in the earlier term of the contract. Overall, the pricing for these larger contracts, where we are highly differentiated, has held up very well as well.
Okay, that's helpful. My follow-up, obviously, guidance is back-end loaded in your fiscal year. Maybe you could just give us some color as to where the confidence is coming from that that's going to be the progression throughout the year. Obviously, the bookings are strong. We've seen quarters in the past where there's been a slower conversion rate of those bookings. Are these large deals that are going to hit in the back half of the year? How should we think about the ramp?
Well, I think there's probably four things I would call out. The first thing I would say is that, first of all, we've got the foundation, generally that we expected to be at the halfway point. There's no real surprises from that perspective. The second thing is the fact that we do have very strong bookings. In fact, if you look at the bookings we've had over the last two quarters, it is as strong as any two-quarter period we've ever had. The third thing I would say is that the three themes that we called out last quarter, which you may remember, we talked about the impact that the transformational deals that we've sold over the last several quarters, the revenue ramp that we see in those contracts.
We talked about the investment that we have made in business services and how that would begin to impact our revenue in the second half of the year. We also talked about the return that we would get from the investment that we have made in several acquisitions and the impact that that would have. I actually have a frog in my throat. Those are the main things I would call out in terms of the reasons for our confidence in the back half of the year.
Yeah, no, sorry for the frog, David. Hopefully nothing to do with the French. The frog fault.
Water could probably help right there.
Yeah. Nothing personal between David. No, you're exactly right. I think we feel confident with the second part of the year exactly that we are where we expect it to be. The large-scale transformation program, together with the return on the investment we are making, and good pipeline, good book-to-bill, and good contracted revenues as well. If you combine all of these factors, they represent a strong basis for confidence for the second part of the year. Yep.
Thank you.
Our next question comes from the line of Keith Bachman with the BMO Capital Markets. Please go ahead, sir.
I had two questions also, if I could. The first is on the consulting side. Your book-to-bill was very strong this quarter. If I look back over the last six or plus quarters, it's been over one, yet that hasn't translated into positive revenue growth. In the February quarter, it was a relatively easy compare and it still came in zero. Could you just comment on how you see the growth over the next couple quarters in consulting specifically, please?
Yeah. For the full year, we still see consulting being flattish to low single-digit positive. With our outsourcing, by the way, being mid to high single digits positive. Our view of consulting really hasn't changed from where it was when we started the year. Again, a little bit of connecting the dots between the bookings and the translation to revenue is what I referenced earlier, is that we actually are seeing quite a bit of growth from a volume standpoint. What we've seen is in the application services area especially, is that we've seen a higher ramp-up or a re-acceleration, if you will, in using our Global Delivery Network. If you looked at the work that we're delivering our clients in volume terms, in consulting overall, it's actually up quite nicely.
Again, we've got the dynamic of the revenue yield per hour as we're using our GDN capability at a higher level compared to the same periods last year. This is a dynamic that we've seen before. It's part of the ebb and flow of our business. We've managed through it before, and we're in the process of managing through it now.
Okay. My follow-up relates to the cash flow. You mentioned that cash flow guidance is coming down. I think you said health is lower variable comp, but I heard is operational investments. I was just wondering if you could elaborate on what those operational investments are. Thank you.
Yeah, to be clear, it was not operational investments, it was operational spending. If you think about it, we started the year with an assumption in our cash flow guidance for what our accrued variable comp would be.
Right.
As our assumption has come down for the year on that now by about $300 million, that assumption for accrued variable comp has been replaced by operational spending, if you will, that has cash out the door as compared to the accrued variable comp, which has no cash out the door this year, would have cash out the door next year. That dynamic is what has impacted our cash flow, which you could say is as much as anything else, a timing issue, because to the extent it has an unfavorable impact on us this year, it will have a favorable impact next year if the scenario plays out, because we would obviously have less cash out the door next year.
David, what are those operational investments, incremental?
It would primarily be higher base payroll, as an example.
Okay.
With the volume growth, in fact, as you look at our headcount statistics, you'll see that our headcount growth over the last couple of quarters has been meaningful. We have more heads, more payroll, base pay comp. We also have slightly lower utilization on the margin as we've been building a bench in certain areas in anticipation of revenue ramping. All of those dynamics come into play.
All right, fair enough. Thank you.
All right. Thank you.
Next we'll go to the line of Jason Kupferberg with Jefferies. Please go ahead.
I just want to get your views on this pricing and mix shift to offshore as far as how much of this you think is structural and kind of a new normal going forward. You're obviously talking about the application services piece, or do you see this as kind of being more of a one-off?
Yeah, both, if you will. I think what we've seen is there is a structural shift, if you will, from onshore to offshore, especially in application services, and something at Accenture we embraced a long time ago, and we have every year more resources offshore participating to the application services. That will not change. We will continue to hire in our Global Delivery Network, and we will continue to try to find the right mix between the offshore and the onshore. This thing is more like, if you will, a secular trend. Now, for all the reasons mentioned by David, at some point in time, different factors are combining and impacting our pricing situation. We mentioned some renegotiation in the context of vendor consolidation. It has happened more in this quarter than other quarters.
David mentioned that when you're selling large-scale transformation program, typically the first year from a pricing standpoint are more diluted and then in term of margin, and then you're recovering at the back end of the program. I think we had a combination of factors in Q2 that has put pressure on the pricing, but the offshoring trend, this one, is no change and is structural.
Okay. Just for my follow-up, coming back to the point on reducing the accrued comp by $300 million or so this year. Can you give us a sense of what % cut in the total accrued comp is the $300 million? Do you have any concerns about the downstream impacts on attrition potentially?
Yeah. It is important to have a little bit of context on this so that it is not misinterpreted. The first thing I would say is that this particular program that we are referencing is one program as part of a much bigger set of variable comp programs that we have in the firm. If you look at our variable comp accruals overall, as I said in my prepared remarks, we accrued a significant amount of variable compensation. In this one particular program, which is targeted at our managers and above, it's not the only variable program targeted at them, but for this one program that is targeted to the managers and above, where the determination of what we accrue in a quarter is based on a formula tied to specific financial metrics. In this particular program, we have accrued less.
For the full year, we expect that it could be in the $300 million range based on our current scenarios, although we are working hard in the back half of the year to improve that. You have to look at that $300 million in the context of a payroll structure that is roughly $20 billion overall. It's meaningful in the context of our cash flow guidance, which is why we called it out so that you could understand the change to cash flow. In the context of our overall payroll structure, it's $300 million on a total base of roughly $20 billion.
Right, the vast majority of the $20 billion is just base pay, right?
Well, vast majority would be a true statement. We do have significant variable comp in our plan, it would be true to say that more of the comp is fixed than variable.
Indeed.
Yeah.
To answer your second question, whether we are concerned or not, I'm not pleased, but I'm not concerned. I'm not pleased because it's always better to accrue all the variable comp you could. I'm not concerned because first, it's mid-year, and I guess we have time to recover in the second part of the year, especially as we see the business shaping for the second part of the year. As David mentioned, this piece is more targeted to our executive and leaders. I'm taking that as a strong incentive for them to perform in the second part of the year so they will receive their variable comp.
Mm-hmm. Very good. All right. Thank you for the comments.
Next question today comes from the line of Edward Caso, representing Wells Fargo. Please go ahead.
Hi. Good morning. Can you talk a little bit about Accenture Digital services? You didn't really mention that. I was sort of surprised.
Couldn't be more pleased with Accenture Digital. You're right. Frankly, thanks a lot for your question because, of course, we have to explain part of the business where we have either, not issues, but challenges or things we want to be very transparent with you and talk where we are. The vast majority of our business is doing just extremely well. That's why I wanted to share with you a couple of programs, including what we are doing for this pharmaceutical company, which is quite a large-scale digital business. We set up Accenture Digital January the 1st. In Accenture Digital, we have now 23,000 people plus, we have probably established, in January, one of the largest digital organization in the world. We're combining all is related to digital marketing with Accenture Interactive, Accenture Mobility around mobility, and Accenture Analytics.
We're very pleased with the result of this unit, which is continue to grow, I would say, with strong double digits. Very pleased. The level of demand is extremely high. More important, I truly believe that Accenture is differentiated in the marketplace. We are more end-to-end than anyone else in digital marketing. Our mobility organization is just on fire. As you know, there is great demand for analytics. Of course, through the creation of Accenture Digital, we have the unique ability now to create synergies among these three capabilities and be even more end-to-end. Extremely pleased with digital.
Great. Can you break out the components of the health and public services to help the European government, the U.S. government? Give us a sense where strengths and weaknesses are.
I could. Let me start, because indeed, in HPS, you have the H and the PS. We commented a lot on health, which continue to be an industry we are very pleased, we are very proud. We made a significant investment three years ago, and now we're getting a strong return. If you're looking on a year-to-date basis, it's one of the industry where we're still growing double digits, so it's part of our top-performing, especially in the U.S., but as well in other parts of the world, in Asia Pacific, to name a few. PS is indeed a different story, and it has been these last years. We continue to be very pleased with what we are doing on the public sector, probably more in the U.S. standpoint. Europe continued to be a challenge from a public sector spending, which is probably not a big new news.
Great. Thank you.
Thank you, Ed.
Next we'll go to the line of James Friedman with SIG. Please go ahead.
Hi. Thank you. Pierre, could you elaborate on your comments regarding Brazil and share some context for that?
Yes, of course. Probably exactly a year ago, we've been taken by surprise, to be honest, with what happened in Brazil. Brazil been performing extremely well for years. At Accenture, we made the right investments. We had the right leadership, and it's still a country when we probably have one of the highest market share at Accenture. All of this not gone. Indeed, 12 months ago, we probably didn't anticipate what happened in Brazil from an economic standpoint, from a geopolitical standpoint, and indeed, Brazil didn't deliver what we expected. We've been working with the leadership of Accenture and the leadership of Brazil very hard these last four quarters to reposition Brazil for new growth. I'm pleased to report that indeed, in Q2, we feel that we are turning the corner with Brazil coming back flat and hopefully positive for the remainder of the year.
This is what I mentioned by turning the corner. We work hard for four quarters, and I guess Brazil will be back with growth.
Thank you. I appreciate the context.
Thank you.
Now we have a question from Bryan Keane with Deutsche Bank. Please go ahead.
Yeah. Hi, guys. Just a couple of follow-ups. Just on the application services area, I guess I'm kind of wondering, why now? I would've thought the move from onshore to offshore has already happened. Why in that particular area is it happening and kind of surprising?
This market is a very large market. If you look at application services, it's probably one of the largest IT market in the world. It's a market that's going to remain extremely competitive for a long time. You have many providers, all extremely competitive, and they all want to grow. They all want to take market share, including us. I don't think it's the end of the prior era, if you will. It's just the continuation of what's happening. You see many of our competitors. Of course, you have the Indian pure players who are already very offshore-centric, if you will, but many of our more classic competitors are accelerating their move to offshore as well. What we see, which might be, let's put that in the new new, is Europe is moving now offshore in a more robust way.
If you look at these offshoring waves. First, U.S., probably 10 years ago. They moved to what I like to call the Anglo-Saxon corridor, for whatever it means for you. U.S., U.K., Nordic, for the older countries not speaking the same language like mine. Here you have, for all sorts of reason, earlier offshoring pickup. Now, I'm taking that as a good news for Accenture, Continental Europe, and I'm thinking about Germany, France, Italy, Spain, we see this offshoring picking up. It's a good news for us because we've been able to leverage our Global Delivery Network, but it's creating a very competitive market as well, in these four or five countries I mentioned.
The pricing and cost pressures, I assume it's going to continue for the back half of the year. What are the offsets you guys are planning to do so that you can still grow margin?
Well, we are working in the areas where the environment is more competitive. First of all, we're working very hard on aligning the cost to serve or our delivery cost with the pricing realities, and that is ongoing. The second thing that we're doing is that we are managing all of the levers of our payroll structure, which we always do, but let's say we're doing it with an even higher level of intensity, to make sure that we optimize the efficiency of our payroll structure against the revenue profile that we see. We're also focused, as you would expect, on discretionary elements of our operating expenses. Then we continue our journey, in terms of our focus on our infrastructure cost and our business management function cost, if you will. So none of those things are new. As I said, we go through periods like this.
This is a normal ebb and flow in our business. So the actions that we're taking, there aren't new bullets in the gun. We're doing the things we always do to manage and optimize our profitability as the business ebbs and flows, and we feel good about the actions we have on the table.
Yeah. At the end of the day, again, we feel confident in our ability to grow our revenues more in the second half of the year based on very clear facts. As we ramp up our organic growth in the second part of the year, we will be able to absorb more cost.
Okay. Very helpful. Last question from me. David, you said you're not expecting much improvement, it doesn't sound like, in the constant currency consulting growth rate. I guess with the bookings being where they are, they've been stronger. What's preventing that increase or acceleration in the consulting side?
Yeah. Flat to low single digit positive. Again, I don't want to be redundant with what I'd said earlier, one of the things we're navigating right now in the consulting growth equation is the acceleration, if you will, of higher utilization of GDN for application services. Yet we see very strong growth in digital. We see growth in other areas of our consulting business as well. The mix of all of that together is what leads us to the flat to low single digit positive.
Okay. I got you. Thanks so much.
Thank you.
We have a question from the line of Katy Huberty with Morgan Stanley. Please go ahead.
Yeah. Thanks. Any update on the average deal compression you're seeing in SaaS deals? Is that where you're seeing any of the pricing pressure? Progress on driving new partnerships like the expanded SAP relationship you talked about in order to offset that impact from SaaS.
Yes. I can take that one, and I'm very pleased to answer and very excited with what we are doing. If you look at the consulting market, the ERP market, the digital market, yes, this software or this as-a-service world is evolving and is evolving quite rapidly. As you've seen, for instance, we are very pleased with the business we're doing with the Salesforce.com. I highlighted one of the largest European implementation of Salesforce. We did it with Schneider Electric a few months ago. Very pleased with the progress we are making on the software as a service. We are investing, especially in the context of Accenture Digital, but as well in the context of our cloud activities, to be much more relevant on this. We are looking at critical partnerships to continue being differentiated in the marketplace.
I absolutely wanted to signal what we are doing with SAP, with this Accenture and SAP Business Solutions Group, where indeed, we're going to co-invest with SAP in quite a meaningful way to create a very industry specific and cloud based and SaaS delivered solutions. We believe it's a true game changer. I'm very excited with that. What we are doing is so far unique in the marketplace.
The average deal compression, is that still in the 15%-20% range for SaaS deals?
Yeah. On the SI, on the pure SI, you're right. We are monitoring that very carefully. When you look at a program, you have the specification, you have the design, you have the change management, you have the integration, you have the testing, and you have the integration in the company. The system integration piece, which is part of this overall program. Yes, we've seen this 20%-30% less effort. What we've seen as well in this large program on SaaS, a significant level of reinvestment of these savings in the other part of the program. All in all, as David mentioned, it's interesting to see that from a volume standpoint, the business is going up and is not going down. We need to manage indeed the equation around the pricing relative to the offshoring. It's not a volume issue.
It's more as in this program, we have a higher level of offshore. It's putting some pressure on the pricing. It's not a volume issue. It's how you're managing the new economics, if you will, and I'm extremely comfortable that we will manage that very well.
Got it. Just a follow-up on bookings. As you know, you enjoyed strong bookings growth in 2012 that didn't convert to the same strong revenue growth last year. What's different about the recent double-digit bookings growth? Is contract duration changing or something else impacting your confidence that we'll see the revenue conversion this time around?
Well, again, I think what is different when you look at where we are this year to last year is that last year we were in a situation that we expected a broad uptick in the market that did not materialize. This year, we're not expecting any change in market conditions. Last year, we had some concentrated areas of weakness that, as Pierre said, using Brazil as an example, which were unexpected. It wasn't just Brazil. There were a few other areas where we had concentrated areas of weakness. In fact, the areas where we had concentrated weakness have generally improved. The third thing that we had last year is that we did have several large contracts that were winding down, where we had an assumption of our ability to replace those revenue streams and then grow on top of it.
That did not happen as expected. This year, in the back half of the year, we don't have that same dynamic. That actually benefits probably four of our five operating groups as they turn to the second half of the year. Again, this year, we've got, we believe, more line of sight to sources of incremental revenue. We have our eyes focused on the things that we have to do to deliver this uptick in revenue that we see. We do think the circumstances as we see it are different than they were last year.
Okay. That's very helpful, David. Thanks.
Thank you.
We have a question from the line of Darrin Peller representing Barclays. Your line is open.
Thanks. Just to follow up on that question around the sort of book-to-bill timing. Is there a difference in % of what's actually contract renewals here versus new business? Just in terms of the size of these contracts and how long they really take to accrue to revenue for the outsourcing side, given just how strong the growth has been there. Can you give us a little more color on the characteristics and the profile of those contracts today versus maybe what they used to look like a couple of years back in terms of size as well as, again, how long you'd expect that to turn into revenue?
I guess if I just talk specifically about this quarter. Every quarter is different, and any single quarter doesn't necessarily indicate a trend. If I just look at this quarter as an example, we did have several very large contracts. If you look at the average size of these large contracts on balance, they're higher than what we've seen, let's say, over the last four to five to six quarters. Because of that, the duration of those contracts or the contract term in this particular quarter has ticked up a little bit. Again, I do know that I would not declare that a trend. The composition of next quarter's bookings, mega bookings will probably be a little bit different.
For this quarter, we did see the average deal size go up, and we saw the duration lengthen, and that does have for the contracts we signed, does have a dynamic in terms of how those convert to revenue with longer duration contracts.
If we.
It is.
Go ahead, Pierre.
Yeah. It is interesting to see if you look at 2013 and now the beginning of 2014, that indeed we've seen the average for Accenture. Probably because of our successful positioning in transformation and mission-critical programs, the size of the deal had been going up and the duration as well is a little bit longer. The positive is giving us more visibility in our business on a long-term basis. Of course, we are monitoring carefully, as you might imagine, the rate of conversion from bookings to revenue. From a visibility standpoint, we couldn't be more pleased that with our level of bookings and the size of the deal. Again, you mentioned, David, we had 10 transactions over $100 million this quarter. If you add Q1 and Q2, I guess we should be around 24.
Right.
Which is a very big number. If you contrast to last year at the same period of time, we were, I guess, around 21. It's slightly higher, but it's the demonstration that if you take 2013 and 2014, we are in the 20-plus, if you will, transaction over $100 million, which is for me the confirmation of our positioning in terms of large scale transformation and that we are highly differentiated in that segment.
All right. No, that is positive. It's not like we're seeing more renewals as a % of the mix than prior years, right?
No, there's not anything notable in that regard.
Okay. All right. Just one quick follow-up on the organic. If you look at the quarter, what actually was the organic revenue growth rate versus-- I noticed there were just a couple of small tuck-ins but
Yeah. As we shared before, we're really just not going to get into specifics on the organic and inorganic because, again, our inorganic is really an engine for organic growth. These businesses really within the first year, in most cases become indistinguishable from our organic business because they get integrated very rapidly. Procurian would be the latest example of that, where we are in the process of quickly integrating it with our existing procurement business, and it's hard to tell one from the other.
Got it.
Okay.
All right. Thanks, Ash.
Thank you.
Tom, we have time for one more question, then Pierre will wrap up the call.
Thank you. Our final question today will come from line from Ashwin Shirvaikar representing Citi. Please go ahead.
Thank you. I guess the question I had was with regards to the ramping of the app services business. Most of your competitors operate their GDN at a higher level of profitability. My understanding is that you guys had normalized the cost equation there. I'm trying to sort of bridge the disconnect between app services growing and your comments on profitability. How much of that is related to, Pierre, your comments that it was in the five countries that you mentioned which might have tougher labor laws, and what's the timeframe then?
What I would say is that our GDN cost rates are extremely market competitive. We don't segment our profitability by application services versus BPO versus digital, et cetera. Ashwin, just to maybe correct a misperception that you might have is that our GDN cost structure is very competitive, which is why we are able to compete very effectively in the application services space. That we should be clear on.
That part I was clear on. I was asking less about cost structure, more about the profitability. We could take that offline. I guess my quick follow-up on a different segment or a different area is, do you expect the relationship between your net income and conversion to cash flow to be different than before, not just this year, but going forward?
Well, Ashwin, what I would say is that all of the factors that have made us a strong cash flow generation business, those factors remain intact. We have a relatively capital-light business. We are very good at managing our billing and collections. As you know, we're focused on growing our business, gaining market share and having modest margin expansion. When you look at all of those things, we have to deliver on all those things. If we do, fundamentally, the structure that allows us to generate cash flow going forward should not be different than what it's been in the past.
One to 1.2 times is a good-
I didn't say 1.2 times. I said that if you think about what would represent a strong cash flow generation, really cash flow equal to net income would be indicative of a very healthy company, and we expect to be a very healthy company.
Got it.
Thank you.
Thank you.
It's five past. Thanks a lot for staying with us. I'm taking this as a strong confidence you're putting in Accenture and a strong interest in our company. Thanks again for joining us on today's call. With the first half of the year behind us, frankly, I feel very confident that we are well-positioned to deliver our business outlook for the year and of course, the updated business outlook David mentioned. We continue to execute a strategy that I believe is differentiating us in the marketplace. With the opportunity to strengthen our leadership position in large-scale transformation program, we talked a lot about it. In digitally enabled solution, a very strong market for us and in new and innovative business services. At the same time, we have a relentless focus on developing the skills and capabilities of our talented men and women around the world.
More than 289,000 people around the world. We can deliver the best of Accenture every day and everywhere in the world. We look forward to talking with you again next quarter. In the meantime, if you have any questions, please feel free to call KC. Thanks a lot for paying attention to us. All the best.
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