Earnings Call: Q3 2013

Jun 27, 2013

Ladies and gentlemen, thank you for standing by. Welcome to Accenture's Third Quarter Fiscal 2013 Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Casey McClure, Managing Director of Investor Relations. Please go ahead. Thank you, Joshua, and thanks everyone for joining us today on our Q3 fiscal 2013 earnings announcement. As Joshua just mentioned, I'm Casey McClure, Managing Director of Investor Relations. With me today are Pierre Nonterm, our Chairman and Chief Executive Officer and Pamela Craig, our Chief Financial Officer. David Ruhlin is also joining us today. As you know, David is currently our Senior Vice President of Finance and will succeed Pam as our Chief Financial Officer on July 1. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda today's call. Pierre will begin with an overview of our results. Pam will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the Q3. Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the 4th quarter and full fiscal year 2013, 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 ks 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. We include reconciliations of those measures where appropriate to GAAP in our news release or on 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, Casey, and thanks everyone for joining us today. Overall, our 3rd quarter results were solid, although revenues came in below our expectations driven by consulting. We again delivered solid bookings, very good profitability and we generated very strong free cash flow. Here is some detail on the quarter. Revenues were $7,200,000,000 up 3% in local currency. While outsourcing growth was 7%, consulting growth was flat, resulting in total revenues slightly below our guided range. We delivered solid new bookings of $8,300,000,000 bringing us to nearly $25,000,000,000 for the 1st 3 quarters of the year. Earnings per share were $1.21 including a benefit of $0.07 from a reduction in reorganization liabilities. Excluding this benefit, earnings per share were 1 point Excluding the reorganization benefit, we delivered record operating income and operating margin expansion of approximately 40 basis points. We generated $1,400,000,000 in free cash flow and continue to have a very strong balance sheet ending the quarter with a cash balance of $5,900,000,000 And we returned approximately $1,200,000,000 in cash to shareholders through share repurchases and the payment of our semiannual cash dividend. We have updated our business outlook for the full fiscal year and David will cover it later in the call. Now let me hand over to Pam, who will review the numbers for Q3 in greater detail. Pam, over to you. Thank you, Pierre, and thanks to all of you for listening today. As Pierre mentioned, our results in the Q3 of fiscal 2013 were solid overall. Although revenue growth of 3 was slightly below our March outlook range and we now expect this trend of slower revenue growth to continue as we finish out our fiscal year. Bookings continue to reflect strength and demand for future transformational services, particularly in outsourcing and bookings were lighter overall than we expected in consulting. Our commitment to managing our business with Unless I state otherwise, all figures are U. S. GAAP except the items that are not part of the financial statements or that are calculations. New bookings for the quarter were $8,300,000,000 above our expectations overall and they included a foreign exchange headwind of negative 3% compared with new bookings in the Q3 last year. Consulting bookings were $3,900,000,000 with a book to bill level of 1.0, which was lower than the 1.1 we were targeting. Outsourcing bookings were $4,400,000,000 at a book to bill level of 1.3. So let me give you some bookings details, starting with consulting, where we were about 10% below our expectations in each of the 3 categories. In Management Consulting, the macro environment continues to be challenging and volatile. Our clients held back on spending more than we expected, particularly in Europe and Brazil, and the environment is more competitive. Our bookings continue to reflect slightly, we do see growth in demand for transformational projects in operations, CRM and risk management. Technology consulting bookings reflected demand for infrastructure consulting projects that span data centers, networks and workplaces as well as IT strategy projects. As mentioned on our last call, we are strengthening our leadership focus on the technology transformation agendas of our clients. System Integration bookings on the one hand reflected rising demand for industry specific software solutions where emerging technologies such as mobility, analytics and cloud are part of the mix. On the other hand, the bookings also reflected lower demand and a more competitive environment for ERP systems work. The decrease in ERP work was most pronounced in some European countries as clients are slowing down their investments in add on work to existing solutions and generally starting fewer large programs right now. Turning to outsourcing, new bookings were well above our expectations. Technology outsourcing bookings were strong as our clients continue to seek solutions for driving operational efficiencies and flexible cost effective sourcing. Our global delivery network continues to be well positioned to meet the increased demand for such solutions. The bookings also reflected moderating demand for add on system enhancements consistent with the pattern just mentioned in systems integration. BPO bookings in Q3 were very strong, driven both by our cross industry offerings, especially finance and accounting and by our industry specific solutions, particularly in Financial Services and Health. Demand for BPO services was strong for both the Americas and EMEA and also increased in APAC as we have now seen a sustained increase in our global market share. Notably, we had bookings of over $100,000,000 at 12 clients with all 5 operating groups represented and several of these were in EMEA. Turning now to revenues. Net revenues for the 3rd quarter were $7,200,000,000 an increase of 1% in U. S. Dollars and 3% in local currency over the same period last year. Q3 revenues were below our guided range of $7,250,000,000 to $7,500,000,000 by about $50,000,000 They reflected a foreign exchange impact of negative 2.5% compared with the Q3 last year, which was consistent with the assumption we have provided in March. Consulting revenues were $3,870,000,000 down 2% in U. S. Dollars and flat in local currency. Outsourcing revenues were $3,330,000,000 an increase of 4% in U. S. Dollars and 7% First, Consulting bookings were almost First, consulting bookings were almost $400,000,000 lower than we expected in March, including a decline in smaller contracts that convert to revenue more quickly. This was the primary factor that negatively impacted our revenue growth this quarter. A second factor relates to the continuing trend of how our bookings are converting to revenue. Our outlook for Q3 assumed a continuation of the slower conversion we have discussed in recent previous quarters. However, we saw an unexpected uptick in the average duration of our new bookings. In addition, more than we expected, our clients are slowing the pace and level of spending per the arrangements they have with us. The lower consulting revenue reflected the most pronounced differences versus expectations in resources and products, in Brazil and some European countries and in systems integration and management consulting. Although our outsourcing revenues and bookings were higher than we expected this quarter, we do see fewer short term contracts and some clients slowing their spending on existing applications. Now let me give you some details about revenue by operating group. Health and Public Service revenues increased 11% in local currency, reflecting significant growth in Health again this quarter, with strength in both consulting and outsourcing and across the 3 geographic regions. Our Health Administration and Connected Health offerings continue to be the primary drivers of growth. We also continue to see growth in public service in both consulting and outsourcing in the Americas and Asia Pacific. And at the same time, we continue to reposition the public service business in EMEA. Financial services revenues increased 8% in local currency with double digit growth in insurance and capital markets. Outsourcing revenues reflected very strong growth overall as our industry business services offerings are putting us more and more at the core of our clients' businesses. Consulting revenues continued their pattern of slight growth, reflecting less demand for smaller projects. While Financial Services is well positioned going forward, particularly in outsourcing, we expect more moderate growth in Q4 compared to the unusually strong growth we had in Q4 of fiscal 2012. The products operating group had local currency revenue growth of 4%. It was higher than that in the Americas and EMEA, partially offset by a decline in APAC. Outsourcing growth was strong across the globe and the different dimensions of products. Despite solid growth in Life Sciences, consulting revenues decreased overall and were lower than we expected. A number of larger ERP programs are now substantially complete right now and we are stepping up to the growing demand for services that enable our clients to transform into more digital companies, including multichannel customer solutions, product lifecycle management and operations. Communications, Media and Technology revenues decreased 3% in local currency. Outsourcing revenues reflected a modest decrease with the expected ramp down from one contract in EMEA, partially offset by very strong growth in the Americas across all industries. Consulting revenues declined slightly overall, but I'm pleased to point out that the communications industry in EMEA and high-tech in the Americas had strong double digit growth. While the communications industry remains dynamic, we believe our offerings around transformation are resonating with our clients. Overall, in CMT, we expect year over year revenue performance to improve going forward. Resources net revenues decreased 3% in local currency due primarily to a decline in natural resources. Outsourcing revenues were flat overall as growth in EMEA and Asia Pacific was offset by declines in the Americas. Consulting revenues declined and continued to be impacted by the completion of several large ERP programs and clients taking a more phased approach to consulting projects. These trends had a higher than expected drag on resources revenues during the Q3. Overall, we expect resources revenues to continue to decline in the near term. Let me comment briefly on our geographies. In the Americas, we continue to be pleased with the strong growth in the United States. EMEA declined very slightly again this quarter as local currency growth is mixed with positive growth in several countries offset by declines in a few others. Growth was impacted by the expected ramp down of one contract in CMT and without the impact of that contract, EMEA overall grew slightly. Asia Pacific was flat in Q3 as we expected growth there to moderate. Growth in China and India was offset by expected declines in Japan and also in Australia, where we had experienced recent periods of very strong growth. We expect APAC revenues to decline slightly next quarter. So to summarize on revenues, we had anticipated a better overall macro environment in the second half of fiscal year, which has not come to pass. And we have experienced some changes in demand patterns as we've gone through the first three quarters. While we now do not see the pickup, the result is that revenue growth has been relatively consistent. It is 4% year to date and we are navigating well in this dynamic environment. Moving down the income statement. Gross margin was 33.9% compared with 33.1% for the same period last year, up approximately 80 basis points. This result did reflect improved outsourcing contract profitability. Sales and marketing expense for the quarter was 887 $1,000,000 or 12.3 percent of net revenues compared with 11.9% of net revenues for the Q3 last year, reflecting higher costs this year to build our pipeline and pursue acquisitions. General and administrative expense was $459,000,000 or 6.4 percent of net revenues, flat compared with the Q3 last year. Finally, like in Q2, we had another reorganization reserve release this quarter. This $50,000,000 benefit represented a further reduction in the reorganization liabilities established when we transitioned to a corporate structure in 2,001. Similar to last quarter, this is a non cash item. And at this point, the reorganization liabilities established 12 years ago are all but behind us. GAAP operating income was $1,140,000,000 in the 3rd quarter. Excluding the reorganization I just mentioned, operating income for the Q3 was $1,090,000,000 or 15.2 percent of net revenue, up approximately 40 basis points compared with Q3 last year. This record result reflects our commitment to driving operating profitability expansion in our business. Our effective tax rate for the quarter was 23.8% compared with 28.5% for the 3rd quarter year. Excluding the benefit of the reorganization item, the effective tax rate for the Q3 of fiscal 2013 was 24.8%. Net income was $874,000,000 for the Q3 and it was $763,000,000 for the same quarter last year. Excluding the benefit of the reorg item, net income for the 3rd quarter was $824,000,000 an increase of 8%. Diluted earnings per share were $1.21 compared with $1.03 in the 3rd quarter last year. Excluding the benefit of the reorganization the So first, without the reorganization items, the increase is made up of $0.03 from higher revenue and operating results, dollars 0.02 from a lower share count and $0.06 from a lower effective tax rate. These add to an $0.11 EPS increase. And we had an additional $0.07 from the reduction in reorg liabilities, which add to a total year over year increase in EPS of $0.18 in the quarter. Turning to DSOs, our day services outstanding continue to be industry leading. They were 30 days, down slightly from 31 days last quarter and in line with Q3 last fiscal year. Free cash flow for the quarter was $1,400,000,000 resulting from cash generated by operating activities of 1,500,000,000 dollars net of property and equipment additions of 91,000,000 May 31 was $5,900,000,000 compared with $6,600,000,000 at August 31 last year, which reflects the cash return to shareholders so far through share repurchases and dividends, the U. S. Pension contribution we funded in Q1 and some acquisitions we have made. We have done very well in allocating a more significant level of capital for strategic and focused new acquisitions this fiscal year, which will contribute growth and revenue synergies to our business going forward. Moving to some other key operational metrics. We ended the quarter with a global headcount of about 266,000 people and we now have approximately 100 and 74,000 people in our global delivery network. In Q3, our utilization was 88% consistent with Q2. Attrition, which excludes involuntary terminations was 12% compared to 11% in Q2 13% in Q3 last fiscal year. Lastly, we expect that more than 50,000 people will join our company this fiscal year. Let me wrap up by commenting on our ongoing objective to return cash to shareholders through share repurchases and dividends. In the Q3, we repurchased or redeemed approximately 7,800,000 shares for $618,000,000 at an average price of $79.55 per share. Year to date, we've purchased 19,800,000 shares for approximately 1,400,000,000 at an average price of $72.94 per share. May 31, we had approximately $3,000,000,000 of share repurchase authority remaining. On May 15, 2013, we made our 2nd semiannual dividend payment for fiscal 2013 in the amount of $0.81 per share, bringing total dividend payments for the fiscal year to $1,100,000,000 So that's it from me. Thanks again for listening these past 7 years. I'd also like to thank all Accenture people, past, present and future for driving our company to greatness. Back to Pierre now to give you an update on some exciting things going on in our business and then over to David for business outlook as he is ready to take over as Accenture's CFO. Thank you, Pam. Our Q3 results demonstrate that we continue to operate in an environment that remains uncertain and volatile. Against that backdrop, we continue to focus on driving profitable growth by increasing operational efficiency to deliver margin expansion and enhancing our competitiveness to gain market share. At the same time, we are investing in our business to develop unique services that sharpen our differentiation and enable us to provide end to end services that deliver tangible business outcomes for clients. As the market continues to evolve rapidly, we clearly see the opportunity to position Accenture for future growth. As I meet with CEOs around the world, it's striking to see how digital is now part of every conversation. Digital is fundamentally disrupting business models and requiring companies to rethink how they operate from how they interact with customers and employees to how they manage their supply chains and collaborate with business partners. I believe that Accenture is very well positioned to help clients transform their businesses to compete in this new digital world. Marketing is one of the key functions that digital is having a huge impact on. Chief Marketing Officers are increasingly looking for integrated solutions that bring together strategy, technology and analytics at scale to get more value out of their investments. To better serve them, we continue to make strategic investments to enhance Accenture Interactive, our digital marketing services group. This include this acquisition of Acuity Group, the 2nd largest independent digital marketing company in the U. S. Shored, a global design firm and earlier this year Aventa, a digital production company. Together, these acquisitions expand our capabilities and position us as a leader in this fast growing segment of the market. Accenture Interactive was key to a recent win at BMW, which selected us to manage the rollout of its new web platform to 100 markets around the world. We will also manage its online marketing campaigns including content customization and social media in local markets, helping BMW deliver the right experiences to the right consumers at the right times. We continue to see strong demand for our digital capabilities in many other areas including analytics and mobility. In analytics, we are helping a major airline improve and personalize experience. We are integrating customer data from different touch points, including mobile devices, tablets, phones and PCs to give the airline a single comprehensive view of customer preferences. And we recently formed a global strategic alliance with GE to leverage our combined capabilities in cloud, analytics, big data and mobility as well as Accenture's industry expertise to deliver on the vision of the industrial Internet. In the aviation industry, Caliris, our joint venture with GE is already providing intelligent operation services to airlines to help them predict potential aircraft maintenance faults and recommend preventing action. We are continuously innovating to differentiate our capabilities to increase our competitiveness. Continue to make good progress with our end to end business services, which combine management consulting technology and business process outsourcing. Through Accenture Finance and Risk Services, we are helping Santander Group transform its corporate credit risk function. The new platform is expected to enable all 12 of Santander's country business units to improve operational efficiency, better manage risk and support Basel III regulatory compliance. And at the same time, we continue to support our clients with their large scale transformation initiatives. We are working with a large international insurance organization to transform its global financial reporting functions using an SAP based solution. The new system allows the client to accelerate their financial close time and more efficiently generate financial statements across operations in 130 countries. Turning to our geographic performance. Despite the challenges Pam mentioned in Brazil, our priority emerging market as a whole continued to grow at a faster rate than Accenture in the quarter. We delivered very strong double digit growth in China, India, South Africa and the Middle East, reflecting the continued improvements in our market position in these important markets for the future. And once again, I would like to recognize the performance of our business in the United States, our largest single market, which posted double digit growth again this quarter. We continue to see a very good return on the investments we have made in banking, insurance, health and life sciences. In summary, in this fast changing yet volatile environment, we are focused on executing our growth strategy with the right intervention in our existing business and targeted investment in new areas for growth. We believe that our innovation agenda, our diverse portfolio of business and our relentless focus on operational excellence will continue to drive top and bottom line results. As you know, this is Pam's last we want to thank her again for many contributions over the years and wish her the very best. David Rolland will become our CFO on Monday and I'm going to turn the call over to him now to provide our business outlook for the Q4 and the full fiscal year. Thanks, Pierre. Before I comment on our guidance, on a personal note, I'd like to thank Pam for her tremendous contribution to both Accenture and our finance function. She has certainly set a high bar for the CFO role and I'll work hard to continue in that tradition. Now turning 13, we expect revenues to be in the range of $6,700,000,000 to 7,000,000,000 dollars This assumes an FX impact of approximately negative 1% compared to the Q4 in fiscal 2012. We expect slight moderation in our outsourcing revenue growth with consulting revenues ranging from a modest decline to a slight increase. For the full fiscal year 2013, based upon how rates have been trending over the last few weeks, we now assume the impact of FX to be negative 1.7% compared to fiscal 2012, a change from the negative 1% we provided last quarter. We now expect our fiscal On new bookings, we continue to expect to be in the range of $31,000,000,000 to $34,000,000,000 for the full fiscal year 2013 and anticipate that they will be in the upper half of that range. We expect quarter 4 will reflect continued strong outsourcing bookings and consulting bookings similar to Q3. GAAP operating margin is now expected to be in the range of 15.2% to 15.3% for fiscal 2013. Excluding the impact of the reorganization benefit year to date, we now expect the adjusted range to be 14.2 percent to 14.3 percent, a 30 basis point to 40 basis point expansion over fiscal 2012. We now expect our annual effective tax rate to be in the range of 18.5% to 19.5% or 25.5% to 26.5% on an adjusted basis. We now expect GAAP earnings per share to be in the range of $4.90 to $4.94 or $4.18 to $4.22 on an adjusted basis. This adjusted EPS range reflects 9% to 10% growth for fiscal year 2013 and includes a $0.03 reduction due to the updated FX assumption of negative 1.7%. For the full fiscal year, we now expect operating cash flow to be in the range of $3,100,000,000 to $3,300,000,000 Property and equipment additions to continue to be approximately 400,000,000 dollars and free cash flow to now be in the range of $2,700,000,000 to $2,900,000,000 Finally, we remain committed to return a substantial portion of the cash we generate to shareholders. In fiscal 2013, we continue to expect to return at least $3,300,000,000 through dividends and share repurchases and to reduce the weighted average diluted shares outstanding by approximately 2%. Looking ahead to fiscal 2014, we're now in the middle of our business planning and as part of that planning, we're analyzing how the different elements of our business are evolving. As we have in the past, we'll provide you with our fiscal 2014 outlook at the Q4 earnings call in September. In closing, it's clear we are now in the midst of a changing demand pattern, particularly as it relates to our consulting business. Having said that, I'm pleased with our positive growth in fiscal which we believe is ahead of market growth and reflects our strong positioning with our clients in the broader market. As always, we remain committed to managing our business with a high degree of discipline, focusing on profitable revenue growth, expanding margins, driving EPS, delivering strong cash flow and returning a significant portion of that cash to our shareholders. With that, we're ready to take your questions. KC? Thanks, David. I would ask that you each take one question and a follow-up to allow as many participants as possible to ask a question. Joshua, would you provide instructions for those on the call, please? The first question comes from the line of Tien Tsin Huang from JPMorgan. Please go ahead. Hi, great. Thank you. Just I guess I'll ask about the consulting side, the small deal activity. I know Pierre you mentioned last quarter that there were some early signs that it might be getting a little bit better, which looks like didn't materialize. Just trying to reconcile that to the shortfall in consulting this quarter. Did demand deteriorate? Or did it just not improve as much as you thought? I guess indeed it definitely didn't improve the way we expected. And we see more soft debts in that part of the in consulting smaller deals. So we expected some improvement and that indeed didn't materialize the way we expected. Got it. So can we say that demand on the for the most part is still generally stable then? It just didn't improve in the quarter? Just to clarify. I would probably say didn't improve. And in that particular segment of the business, it has been probably softening a bit. Okay. So a little bit of softening. Fair enough. Did curious my follow-up, any what are you hearing from your clients as it relates to immigration reform? I guess it just passed in the Senate just a few minutes ago. What are you hearing from clients with respect to that? Is it impacting demand at all? And just generally, what are the implications for Accenture? Hey Tien Tsin, this is David. How are you doing? Hey David. I'm going to give you the answer that you're probably expecting, but we really can't comment on pending legislation. What I can say is that we have a global workforce. Most of the people who work for us in the United States are U. S. Citizens and where we use the Visa program, we use it where we have to get specialized skills not otherwise available and then also leverage our global delivery network. And so really that's our position on this and we really just can't speculate or comment any further on what may or may not happen with legislation. Got it. Fair enough. I appreciate that. Thanks again to Pam. Thanks, Tien Tsin. Thanks. Rod Bourgeois from Bernstein. Please go ahead. Okay, great. And Pam, best wishes to you as well. Guys, so your report emphasizes the weakness in consulting demand, but I want to focus a bit here on the outsourcing demand environment. The outsourcing revenue growth was also light versus expectations. So I guess I'm wondering did outsourcing add on revenues struggle or did you see new deal ramps struggle or some combination the 2? Hey, Rod, it's Pam. We did see a combination. I mean, first of all, I mean, versus our expectations, outsourcing revenues came in well. And we did, as I mentioned, see we do see some of the sort of smaller add on application work to existing applications that is slowing a bit. But at the same time, we have this real strength in BPO. So it's a real mix of things. And some of these bigger deals, as we mentioned with the durations, those are continuing to ramp up slower. Okay. And so given the ongoing strength in outsourcing bookings, should outsourcing revenue growth reaccelerate sometime soon? I know you're expecting some moderation in growth in Q4, but the bookings would imply that you at least have ingredients in place for that revenue growth to potentially accelerate. So can you give us some insight on how you're expecting the revenue growth progression in the outsourcing segment after Q4? Hey, Rod, this is David. And I'm not going to comment in specific terms as we're really in the middle of planning FY 2014 and we'll come back in September and give you more specific insight on your question. What I can tell you is that we feel very good about our outsourcing pipeline. We feel very good about the bookings that we've generated not only this quarter, but for the last 2 or 3 quarters. We've had a large number. If you reflect on what Pam said about the number of deals we had over 100,000,000 dollars this quarter and as well as what we've said the last two quarters. We've had a lot of large very good contracts that we've closed so far and we feel very good about the larger contracts that we have in our pipeline. And so on the back of that, we are building a very good base of contracted revenue and that ultimately gives us confidence going forward in the strength of our outsourcing business. In terms of specifics relative to growth beyond quarter 4, we're just in a position to comment on that specifically. All right. Hey, just a little bit of pushback on that. I mean, I understand you don't want to get into fiscal the next fiscal year. But with the outsourcing outsourcing booking strength and the deceleration that's happening in outsourcing, is there something happening where duration has ramped up in such a significant that it's making the bookings look stronger than the amount of revenue that can be supported by those bookings? Or are you actually maybe seeing some things that are getting booked and then they actually fall out of the business? And so you're seeing some fallout in work that you've previously booked. I mean is there something happening along those lines? Yes. Just a couple of thoughts to your question. I mean first of all and I'll just work backwards, we have not seen any change in cancellation. So cancellations are not evident in anything we've seen to date. There's not any abnormal pattern in that regard. So we really don't have a situation where we're contracting work and then it is being canceled. The other thing I would say is that nothing's changed in our business and in terms of our criteria for reporting bookings. It's based on having a signed legally binding agreement with our clients that stipulates our services and what the services and the fees will be that we'll earn over that contract. And so our contracted revenue is solid as it's been as well. Now we have had some over the last 2 or 3 quarters at different periods, our new bookings have had the characteristic of longer duration. And that is impacting the conversion of outsourcing bookings to revenue similar to what we have seen in consulting, but yet the contracted revenue that we have resulting from the bookings that we've had, we feel very good about. Hey, Rod. This is Pam. I'll just add one comment and that is for smaller outsourcing bookings, there's a certain amount of that that ends up getting filled in, in the quarter, right? They're not these big, bigger transformational kinds of deals, but more, small or sometimes add on kinds of things. And that's the bucket of things that we've seen be a little softer. Makes sense. All right. Thank you, guys. Thank you, Rod. Bryan Keane from Deutsche Bank. Please go ahead. Hi. Just wanted to ask also and follow-up on the outsourcing side. I guess our surprise was it had been almost 10 quarters I think of double digit growth in outsourcing. And yet coming in at 7% constant currency you guys seem to be happy with that or at least better than expectations. So maybe our expectations are off on what the long term outlook should be in outsourcing and maybe the double digit growth that we've had in the past was never going to be sustainable. So maybe you can just talk about that. Well, part of it is we have mentioned for several quarters now that we had a large contract in Europe and that contract throughout this year has impacted our revenue growth in total, but also in outsourcing. And the peak level of impact, if you will, within the 3rd quarter. So that is reflected in the growth percentage that we're reporting. And of course, it will continue to have an impact in the Q4 as well to a lesser extent, but then over time that will drop out of our compare and we'll have more of an apples to apples comparison. I mean even when we planned the year Brian, I mean we were expecting this moderation in outsourcing. What didn't materialize as we expected was the pickup in consulting in the latter part of the second half of the year. Okay. And also there might have been a few acquisitions that rolled off in the outsourcing side, just clarification on that. And then renewals, is renewals also in the bookings, so that could be inflating the bookings number, why it's not translating into revenue? Renewals are reflected in our bookings, but again there's not anything abnormal about the renewals that we've had in our portfolio relative to outsourcing new bookings we've reported in the past. Okay. And then just finally for me, contracted revenue over the next four quarters, I know it was 8% in the Q1. I don't think we got it in the Q2 and then it would be great to have it this quarter as well. Thanks. Yes. In fact, it was not that question was not asked last quarter, so your memory is very good. But the contracted revenues that we have and we give you this number as over the next 4 quarters, but we have about 10% growth or 10% more contracted revenues over the next 4 quarters. And for what it's worth, it was 8% last quarter. Yes. Thanks so much. Julio Quinteros from Goldman Sachs. Please go ahead. Hey, guys. Maybe just coming back to the other points that you guys made on the rate of competition changing. Can you just go back through that in terms of where the competitive dynamics are changing? Is this a function that is translating into pricing pressure for you guys? How do you if you guys could just maybe elaborate a little bit on the competitive dynamics there that would be helpful? Yes. I will take that one. Thanks a lot for doing the audio. I mean the competition, I would characterize as pretty stable across the patch. I mean as you know, we're competing against the same range of competitors. Now it is true that in some parts of the world and I'm thinking about again consulting Europe, Brazil, as it has been mentioned before, resources and more natural resources. When the market is softening a bit, then the level of competition is naturally increasing and putting more pressure on pricing and on competition there. But I would characterize that this has quite concentrated on few areas of the business, the one I just mentioned before, specifically those 3. For the rest of the business, I believe that the competition is pretty stable. I would not notice anything specific in that quarter. Okay, great. And then just as a follow-up, what were the fiscal 4th quarter consulting local currency growth expectations in outsourcing again? You've got it. Yes. We just said that my comment was that it would moderate a little from the 7% that we just reported in the 3rd quarter. For outsourcing? Yes, for outsourcing. And what about consulting? Consulting will be kind of low single digits negative to slightly low single digit positive. Okay. So some hope for growth. Okay. All right. Thank you. Jason Kupferberg from Jefferies. Please go ahead. Thank you, guys. Maybe just wanted to start with a question for David. I mean, as you prepare 3 months from now to give us your initial fiscal 2014 guidance, Are you rethinking any of the internal budgeting or forecasting processes just given what seems to be like a little bit of some loss of visibility reflected over the last few quarters that was more exacerbated this quarter, I would say relative to expectations. I mean, I'm just sort of building on the comment you guys had made that the consulting bookings, I think you had said were about $400,000,000 light in the month of March, but I know you guys had spoken to us at the very end of March and things actually sounded pretty good then. So just wanted to get your take on the overall internal budgeting and forecasting processes and systems and if you think any adjustments are needed there? Yes. Jason, that is a very fair question to ask and I'll start off by telling you that we're not in the business of missing guidance and we don't find that to be acceptable. So that would not be our expectation going forward. Having said that, we do have a very robust planning forecasting function in Accenture. And I think that as much as anything else, we have found ourselves in this period of change and evolution in particular in the consulting business. We've had some areas of our business where the activity is much different than we would have expected, some of which would have been tough to predict like the depth of the economic challenges in Brazil, some of the growth challenges in Japan. And frankly for anyone, I think it's tough to predict even today what's happening in Europe with the macro environment. And so we have a large complex business and a large complex world and even the best forecasting processes when you're going through a period of change. You can have in our case a quarter where the lens was not as clear as we would have hoped it would have been. And so we are always trying to get better in everything we do forecasting included. We've certainly learned a lot over the last 2 or 3 quarters and we're putting those insights that we've learned this quarter in particular to good use in terms of being better predictors of our business going forward. And just as a follow-up, can you talk about you mentioned clients are holding back on spending and you were pretty clear that you're not seeing cancellations. So obviously, that's good news. But maybe if we can just parse this a little bit more. Is this client holding back on decisions regarding new bookings? Or is it more that they're slowing down the ramp of existing projects? Or is it really just kind of an even mix of both of those? I would probably take the a little bit of both. I mean, definitely the overall environment has not been progressing probably the way we all expected including our clients when you look at our Q3. The situation in Europe is not even slightly better. It's probably slightly worse even if we do not have Greece event, if you will. The environment is moving from an economic standpoint to recession. And so the mood with our clients over there is still to be thoughtful and to be very mindful about the way they invest. And when clients are thoughtful and mindful, they tend to wait a little bit more and to think further on when and how much they're going to invest. It's particularly true when it's about smaller projects as we mentioned. But indeed, this is what I would characterize as this softness, particularly true in Europe and in Europe in South Europe to be even more specific. And it's definitely true and that to be honest not something we anticipated at that level in Brazil. Situation has changed recently and clearly we have good discussions with clients over there, but we see more discussion and the clients postponing or delaying their decisions. So that's the kind of environment, again, I would characterize especially in Brazil, Southern Europe and the natural resources given the cyclical nature of that business, especially the mining business. Okay. Thanks for all the thoughts. Thanks, Jason. Steve Bachman from the Bank of Montreal. Please go ahead. Hi. Thank you very much. I had 2 also. And the first one is what are the conditions to enable the consulting business to grow? When we started the year, there was expectations particularly exiting the year that would be mid to high single digits and now you're kind of tracking at 0% growth. Is it purely economic? Or is there other practice areas or competitive landscape as you think about FY 2014? But more broadly, what are the conditions that would enable consulting to grow? I think first and thanks a lot for the question, Kees. I think consulting, it's all about launching projects, programs, if you will. So it's slightly different from the mindset on outsourcing, which most of the time is more driven through cost optimization. Consulting is more about building for the future, if you will, for clients. And building for the future is requiring confidence, confidence in the economic outlook, confidence in the business. And again, there are parts of the world where that confidence is not at the level we expected. And so what we can guess is indeed the economic condition in Europe would progress If the situation in Brazil as well is moving to a more positive outcome, then confidence will be rebuilt with our clients and investors and we might see more consulting pickup. But that is probably what that is. The level of confidence is not at the level we expected and there is a eroding economic conditions in some parts of the world. Okay. But presumably within that context you feel like you have the risk to the downside appropriately captured at this point at least for the next quarter or so on consulting? Yes, we think we do. We feel like we've got a reasonable range reflected in our guidance. Again, it reflects the learnings from the Q3. Okay. Well, let me ask my follow-up then as you highlighted during the call the importance of acquisitions, and I certainly think that's a sound strategy, a great strategy. Is there a way that you could highlight, A, what was the level of acquisition driven revenue this quarter? Did it contribute any amount of points of growth, one point or so? And then, B, how do you think about it going forward? Is there a way that you could provide some dimension as we think longer term of either percent of cash flow or percent of revenue growth that you're targeting as you think more broadly about acquisitions? And that's it for me. Thank you. So Keith, I'll just quickly give you the answer on the quarter, which was it was less than 1%. And then let me turn it over to Pierre to give you the future look here. Yes. In the current context, but it's not new. I mean that's strategy we discussed with all of you during the IEA days and recently, we will use acquisition as a way for us to invest in fast growing areas and to execute our growth strategy and this is exactly what we do. Indeed, we set as an objective to deploy something like 15% of our free cash flow in acquisition and this is what we are doing. I think we are doing that this year in a very efficient way around our clear strategic initiatives, clear priorities in term of industry, clear priorities in term of technologies. I mentioned the digital marketing as a fast growing area where we have been deploying our capital into acquisitions. And we will continue to do so to make sure that through acquisition we are capturing new waves of growth. And we're pleased with and I'm particularly pleased with what we've been doing this year in that front. And this is what we see. You remember the acquisition we made I think a year ago, 18 months ago to build Accenture Mortgage Services on back of the acquisition of Denta. And we're very pleased, for instance, with the return we're getting from that acquisitions. That is true across the board. And just another little data point for you Keith. So we do expect it will be higher than the 15% of operating cash flow this year. Okay. Fair enough. Thanks, Pam. Good luck. Thanks. Thank you. Sarah Gubbins from Bank of America. Please go ahead. Hi. Thank you. You haven't made any change to your headcount plans in spite of the weaker trends. So I'm wondering if there's any shift in the capabilities that you've been adding or you will be adding or if it suggests that headcount should ramp the addition should ramp down into the next year? Yes. I think on the headcount, I mean the first thing I would say, Sarah, is that our headcount in the Q3 was very well utilized. Our utilization rates were very high as Pam indicated. And if you think about the upper end of our range in the 4th quarter, it's right at about what we just did in the Q3. And so underneath our headcount, you can see a little more increase in GDN I think in the quarter we just completed as opposed to our onshore resources. But we are very, very good and I think that's one of the areas that operationally we've really proven over the quarters and years to be very strong as managing our supply and demand. So we'll continue to move our headcount both the mix by location, total headcount as our revenue forecast evolves. You were up 5,000 and 4,000 in the GDN. Yes. It was all GDN, almost all GDN. Okay. Thank you. And then as a follow-up, given the slower demand environment, I'm wondering if you're seeing any pressure in pricing either from a competitive dynamic or, from your clients as you renegotiate? We're not seeing that overall, but on an isolated basis in these concentrated areas where we have seen softening and thus more competition, it has been more price competitive. Okay. Thanks a lot. You bet. Thank you. Edward Caso from Wells Fargo Securities. Please go ahead. Great. You mentioned business process outsourcing BPO several times in a positive way. And I was curious maybe if you could flesh it out a little bit more particularly along the lines of say strength in generic kind of F and A work versus more industry specific? And what Accenture is doing to win and sustain and expand work? Thank you. Thank you, Ed, for the question. And indeed, very pleased you're asking the question. I'm a big fan of our BPO business and very pleased with our results. That's an area where we've been very specific about the industry about the strategy we want to execute, which is all around being extraordinarily focused. And you mentioned finance and accounting as one of these area I could mention as well, procurement as administration, where we are taking some leading position and we are shooting for scale with good results. I in the verticals. I mentioned Accenture Credit Services, where we're providing mortgage processing capabilities, regulatory disclosure with Life Sciences. And indeed, again, in addition to the at scale horizontal we've developed, we're executing exactly the same strategy in some priority industries with vertical, insurance, banking, life sciences. I can mention as well health. And no surprise that you've seen that these 4 industries posting good growth. And finally, BPO is a business where we always aim at differentiating ourselves, adding more capabilities and more insights in what we do, especially around bringing analytics across the board to make our BPO more relevant and cutting edge. My other question is sort of on the contract terms. You talked about pricing a little bit, but are you seeing tightening up on the contract terms maybe where the risk profile of the contract maybe getting a little higher now in the current environment? I don't think there's anything major to speak of there, but certainly on the margin here and there we do have those challenges. Great. Thank you. Thank you, Ed. Steve Milunovich from UBS. Please go ahead. Great. Thank you very much. You mentioned some slowing in ERP. Do you view that as just a macro issue in terms of less add on business or perhaps also reflective of more secular shift to cloud based work? Yes. It's the former. I think it's there's just a little less of the add on work going on right now. There's fewer of the big ERP things starting. I've been I used to do this work myself. I mean these things just go through those kinds of periods it will certainly pick up again, but we do see that trend right now. Okay. And then you mentioned analytics and so forth. As you know some people talk about the new technologies that SMACK or whatever acronym you want to use. Is there any aggregation that you can provide in terms of how much of that kind of business you do? How fast it's growing? We're very pleased with where we are. And indeed it's an area of high growth for us. So what we would put in this the smack for us that would be digital marketing, analytics, mobility, cloud, clearly are areas where we have something I would characterize as very strong growth. Very strong growth, yes. And is that pretty much across the board or is it in particular industries? It's pretty much across the board. Now you have some industries are more early adopters and especially the consumer based industries are more analytics, mobile, SMAC driven, if you will. So communication, banking, insurance, consumer packaged goods, retail, this is where they are investing in the SMAC world. Imagine that, Pierre talking smack. Thank you. Joshua, we have time for one more question, then Pierre will wrap up the call. Katy Huberty from Morgan Stanley. Please go ahead. Yes. Curious understanding there are several areas of weakness in international markets. Curious if you're seeing a positive inflection in customer mentality in the U. S? We're beginning to hear that customers here are shifting from cutting to more of a revenue growth focus? I love the U. S. I love that market. And I love the U. S. For Accenture for many reasons. First, it's a very large market for Accenture, as you know. 2nd, it's a market where we again posted double digit growth this quarter and probably for some very good reason. I mean, first, the overall economic environment in the U. S. Is better than in the rest of the world. That's a fact. 2nd is U. S. Companies are more than any other companies in the world early adopters of new technologies. So when you look at this famous SMAC, the early adopters the creators of the SMAC are in the U. S. And the early adopters of these new technologies are more in the U. S. So this is what's making the U. S. Today a more vibrant practice for our country. Okay. And then just as a follow-up going back to the discussion of headcount, given the weakness in a number of countries, why remain committed to the more than 50,000 adds this year given the mantra of profitable growth and revenues 50,000 is bringing in skills in targeted areas. SMAC has that $50,000 is bringing in skills in targeted areas, SMAC as an example, where we're bringing in skills in high growth areas. The other thing about our business is that we always have true of our business, you always have some churn of resources and that's healthy for our business. And so we're always going to have hiring even if our headcount is relatively stable. We're always going to bring in people both for skill reasons and also just part of our ongoing pyramid refresh, which by the way has a is part of our profitability agenda as well, how we manage that headcount in the pyramids. Okay. Got it. Thank you. Okay. Thank you, Katie, and thanks all of you for joining us today. In closing, let me share with you a couple of thoughts. Needless to say, we are operating in a fast changing environment, where disruptive technologies and new business models are accelerating the need for our clients to transform their businesses. And this is driving demand for our services. Yes, we've been challenged in few concentrated areas such as consulting in Europe, Brazil and resources, but we are running Accenture as a portfolio of business. And as I look at the year to date, there are many key areas where we are performing extremely well with double digit growth including BPO, the United States, China, Mobility Cloud Analytics, Insurance, Capital Market, Health and life sciences. This is giving me the confidence that we are executing the right strategy, building off a very strong platform including our diamond client relationships, our brand, our industry expertise and our global delivery capability as well as our unique position in the technology ecosystem. The Accenture leadership team, supporting Bayer266 shareholders. We look forward to talking with you again next quarter. In the meantime, if you have any questions, please feel free to call KC. All the best. 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