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. If you wish to ask a question, please press star then one. Should you require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, KC McClure, Managing Director of Investor Relations. Please go ahead.
Thank you, Joshua, and thanks, everyone, for joining us today on our third quarter fiscal 2013 earnings announcement. As Joshua just mentioned, I'm KC McClure, Managing Director of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer, and Pamela Craig, our Chief Financial Officer. David Rowland 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 1st. 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. Pam will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the third quarter.
Pierre will then provide a brief update on our market positioning. David will then provide our business outlook for the fourth 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-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. 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. Let me turn the call over to Pierre.
Thank you, KC, and thanks, everyone, for joining us today. Overall, our third 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 $7.2 billion, 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 $8.3 billion, bringing us to nearly $25 billion for the first three 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 $1.14, an increase of 11%.
Excluding the reorganization benefit, we delivered record operating income and operating margin, with operating margin expansion of approximately 40 basis points, which generated $1.4 billion in free cash flow and continued to have a very strong balance sheet ending the quarter with a cash balance of $5.9 billion. We returned approximately $1.2 billion in cash to shareholders through share repurchases and the payment of our semi-annual 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 third quarter of fiscal 2013 were solid overall. Although revenue growth of 3% was slightly below our March outlook range, we now expect this trend of slower revenue growth to continue as we finish out our fiscal year. Bookings continued to reflect strength and demand for future transformational services, particularly in outsourcing, bookings were lighter overall than we expected in consulting. Our commitment to managing our business with rigor and discipline was reflected in our strong operating profitability, earnings per share, and cash flow this quarter. Let's go through the numbers. 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 $8.3 billion, above our expectations overall, they included a foreign exchange headwind of negative 3% compared with new bookings in the third quarter last year. Consulting bookings were $3.9 billion, with a book-to-bill level of 1.0, which was lower than the 1.1 we were targeting. Outsourcing bookings were $4.4 billion at a book-to-bill level of 1.3. Let me give you some bookings details, starting with consulting, where we were about 10% below our expectations in each of the three 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, the environment is more competitive. Our bookings continue to reflect projects that are larger and longer in duration, we booked fewer short-term projects.
Although our pipeline is down 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 million at 12 clients, with all five operating groups represented, and several of these were in EMEA.
Turning now to revenues, net revenues for the third quarter were $7.20 billion, an increase of 1% in US dollars and 3% in local currency over the same period last year. Q3 revenues were below our guided range of $7.25 billion-$7.5 billion, by about $50 million. They reflected a foreign exchange impact of -2.5% compared with the third quarter last year, which was consistent with the assumption we had provided in March. Consulting revenues were $3.87 billion, down 2% in US dollars and flat in local currency. Outsourcing revenues were $3.33 billion, an increase of 4% in US dollars and 7% in local currency. Our revenue growth in consulting was not at the level we expected this quarter. First, consulting bookings were almost $400 million 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.
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 three geographic regions. Our health administration and connected health offerings continued to be the primary drivers of growth. We also continued to see growth in public service in both consulting and outsourcing in the Americas and Asia Pacific. 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 our larger ERP programs are now substantially complete right now. We are stepping up to the growing demand for services that enable our clients to transform into more digital companies, including multi-channel 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. 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 third quarter. 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 U.S. 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. 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.
To summarize on revenues, we had anticipated a better overall macro environment in the second half of our 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 to 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 million, or 12.3% of net revenues, compared with 11.9% of net revenues for the third quarter last year, reflecting higher costs this year to build our pipeline and pursue acquisitions.
General and administrative expense was $459 million, or 6.4% of net revenues, flat compared with the third quarter last year. Finally, like in Q2, we had another reorganization reserve release this quarter. This $50 million benefit represented a further reduction in the reorganization liabilities established when we transitioned to a corporate structure in 2001. 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 $1.14 billion in the third quarter. Excluding the reorganization item I just mentioned, operating income for the third quarter was $1.09 billion or 15.2% 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 third quarter last year. Excluding the benefit of the reorganization item, the effective tax rate for the third quarter of fiscal 2013 was 24.8%. Net income was $874 million for the third quarter, and it was $763 million for the same quarter last year. Excluding the benefit of the reorg item, net income for the third quarter was $824 million, an increase of 8%. Diluted earnings per share were $1.21, compared with $1.03 in the third quarter last year. Excluding the benefit of the reorganization item, EPS for the third quarter were $1.14. Let me walk down the components of the $0.18 year-over-year increase in EPS.
First, without the reorganization item, the increase is made up of $0.03 from higher revenue and operating results, $0.02 from a lower share count, and $0.06 from a lower effective tax rate. These add to an $0.11 EPS increase. 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 DSO, our Days Sales 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 $1.4 billion, resulting from cash generated by operating activities of $1.5 billion, net of property and equipment additions of $91 million.
Moving to our level of cash, our cash balance at May 31 was $5.9 billion, compared with $6.6 billion at August 31 last year, which reflects the cash returned 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 head count of about 266,000 people, and we now have approximately 174,000 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 and 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 third quarter, we repurchased or redeemed approximately 7.8 million shares for $618 million at an average price of $79.55 per share. Year to date, we've purchased 19.8 million shares for approximately $1.4 billion at an average price of $72.94 per share. At May 31, we had approximately $3 billion of share repurchase authority remaining. On May 15, 2013, we made our second semiannual dividend payment for fiscal 2013 in the amount of $0.81 per share, bringing total dividend payments for the fiscal year to $1.1 billion. That's it from me. Thanks again for listening these past seven 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 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. These include the acquisition of Acquity Group, the second-largest independent digital marketing company in the U.S., Fjord, a global design firm, and earlier this year, avVenta, 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 its customer experience. We are integrating customer data from different touchpoints, including mobile devices, tablets, phones, and PCs, to give the airline a single comprehensive view of customer preferences.
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, Taleris, our joint venture with GE, is already providing intelligent operation services to airlines to help them predict potential aircraft maintenance faults and recommend preventive action. We are continuously innovating to differentiate our capabilities to increase our competitiveness. We 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.
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 markets 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. 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 earnings call, and we want to thank her again for her many contributions over the years and wish her the very best. David Rowland 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 fourth quarter 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 to guidance. For the fourth quarter of fiscal 2013, we expect revenues to be in the range of $6.7 billion to $7 billion. This assumes an FX impact of approximately -1% compared to the fourth quarter 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 -1.7% compared to fiscal 2012, a change from the -1% we provided last quarter. We now expect our fiscal 2013 revenue to be in the range of 3%-4% growth in local currency. On new bookings, we continue to expect to be in the range of $31 billion to $34 billion for the full fiscal year 2013 and anticipate that they will be in the upper half of that range. We expect quarter four 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%-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%-14.3%, a 30-40 basis point expansion over fiscal 2012. We now expect our annual effective tax rate to be in the range of 18.5%-19.5%, or 25.5%-26.5% on an adjusted basis. We now expect GAAP earnings per share to be in the range of $4.90-$4.94, or $4.18-$4.22 on an adjusted basis. This adjusted EPS range reflects 9%-10% growth for fiscal year 2013 and includes a $0.03 reduction due to the updated FX assumption of -1.7%. For the full fiscal year, we now expect operating cash flow to be in the range of $3.1 billion-$3.3 billion.
Property and equipment additions to continue to be approximately $400 million, free cash flow to now be in the range of $2.7 billion-$2.9 billion. Finally, we remain committed to return a substantial portion of the cash we generate to shareholders. In FY 2013, we continue to expect to return at least $3.3 billion through dividends and share repurchases and to reduce the weighted average diluted shares outstanding by approximately 2%. Looking ahead to FY 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 FY 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 FY 2013, 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 instruction for those on the call, please?
Once again, ladies and gentlemen, if you have a question, please press star one. The first question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead.
Hi. Great. Thank you. 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 it 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?
Yes, indeed, it definitely didn't improve the way we expected. We see more softness in that part of the business in consulting smaller deals. We expected some improvement, and that indeed didn't materialize the way we expected.
Got it. Can we say that demand, 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
Okay
In that particular segment of the business, it has been probably softening a bit.
A little bit of softening. Fair enough. Curious, my follow-up, 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 am going to give you the answer that you are probably expecting, we really cannot comment on pending legislation. What I can say, as you know, is that we have a global workforce. Most of the people who work for us in the U.S. 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. So really, that is our position on this, and we really just cannot 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. Pam, best wishes to you as well. Guys, 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. I guess I'm wondering, did outsourcing add-on revenues struggle, or did you see new deal ramps struggle, or some combination of the two?
Hey, Rod, it's Pam. We did see a combination. First of all, versus our expectations, outsourcing revenues came in well. We did, as I mentioned, see some of the sort of smaller add-on work to existing applications that is slowing a bit. At the same time, we have this real strength in BPO. It's a real mix of things. Some of these bigger deals, as we mentioned, with the durations, those are continuing to ramp up slower.
Okay. Given the ongoing strength in outsourcing bookings Should outsourcing revenue growth re-accelerate 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. 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. 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 two or three quarters. We've had a large number. If you reflect on what Pam said about the number of deals, we had over $100 million 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.
On the back of that, we are building a very good base of contracted revenue. That ultimately gives us confidence going forward in the strength of our outsourcing business. In terms of specifics, relative to growth beyond quarter four, we're just not in a position to comment on that specifically.
All right. Hey, just a little bit of pushback on that. I understand you don't want to get into the next fiscal year, but with the outsourcing booking strength and the deceleration that's happening in outsourcing, is there something happening where duration has ramped up in such a significant way that it's making the bookings look stronger than the amount of revenue that can be supported by those bookings? 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? Is there something happening along those lines?
Yeah, just a couple of thoughts to your question. First of all, and I'll just work backwards, we have not seen any change in cancellation. Cancellations are not evident in anything we've seen to date. There's not any abnormal pattern in that regard. 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 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.
Yeah.
Our contracted revenue is as solid as it's been as well. Now we have had over the last two or three 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 had seen in consulting. 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 ends up getting filled in in a quarter, right? That they're not these bigger transformational kinds of deals, but more smaller, 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. 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. 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. That contract throughout this year has impacted our revenue growth in total, but also in outsourcing. The peak level of impact, if you will, was in the third quarter. That is reflected in the growth percentage that we're reporting. Of course, it will continue to have an impact in the fourth quarter as well to a lesser extent, over time, that will drop out of our compare, and we'll have more of an apples to apples comparison.
Even when we planned the year, Bryan, 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. Also, there might have been a few acquisitions that rolled off on the outsourcing side, just clarification on that. Then renewals. Is renewals also in the bookings, that could be inflating the bookings number, why it's not translating into revenue?
Renewals are reflected in our bookings, 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. Just finally for me, contracted revenue over the next four quarters, I know it was 8% in the first quarter. I don't think we got it in the second quarter, then it'd be great to have it this quarter as well. Thanks.
Yeah. In fact, that question was not asked last quarter, your memory is very good. The contracted revenues that we have, and we give you this number as over the next four quarters, we have about 10% growth or 10% more contracted revenues over the next four quarters.
For what it's worth, it was 8% last quarter.
Yeah.
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? If you guys could just maybe elaborate a little bit on the competitive dynamics, that'd be helpful.
Yes, I will take that one. Thanks a lot for doing, Julio. The competition I would characterize as pretty stable across the patch. As you know, we're competing against the same range of competitors. Now, it is true that in some part 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. I would characterize that this as quite concentrated on a few areas of the business, the one I just mentioned before, specifically those three. 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. Just as a follow-up, what were the fiscal fourth quarter consulting local currency growth expectations and outsourcing again?
You've got it.
Yeah, my comment was that it would moderate a little from the 7% that we just reported in the third quarter.
For outsourcing?
Yeah, for outsourcing.
What about consulting?
Consulting will be low single digits negative to slightly low single digit positive.
Okay, some hope for growth. Okay.
Yeah.
All right. Thank you.
Jason Kupferberg from Jefferies, please go ahead.
Thank you, guys. Maybe just wanted to start with a question for David. As you prepare three 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'm just sort of building on the comment you guys had made that the consulting bookings, I think you had said, were about $400 million 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.
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.
Yeah. Jason, that is a very fair question to ask. 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. That would not be our expectation going forward. Now, 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. Frankly, for anyone, I think it's tough to predict even today what's happening in Europe with the macro environment.
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. We are always trying to get better in everything we do, forecasting included. We've certainly learned a lot over the last two or three 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.
Just as a follow-up, you mentioned clients are holding back on spending, and you were pretty clear that you're not seeing cancellations. Obviously that's good news. Maybe if we can just parse this a little bit more, is this clients 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 a little bit of both. 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 a Greece event, if you will. The environment is moving from an economic standpoint to recession. The mood with our clients over there is still to be thoughtful and to be very mindful about where they invest. 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. Indeed, this is what I would characterize as this softness.
Particularly true in Europe, and in Europe, in Southern Europe, to be even more specific. 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. That's the kind of environment, again, I would characterize, especially in Brazil, Southern Europe, and natural resources, given the cyclical nature of that business, especially the mining business.
Okay. Thanks for all the thoughts.
Thanks, Jason.
Keith Bachman from the BMO Capital Markets, please go ahead.
Hi. Thank you very much. The first one is, what are the conditions to enable the consulting business to grow? When it started the year, there was expectation, particularly exiting the year, that it 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? More broadly, what are the conditions that would enable consulting to grow?
I think first, and thanks a lot for the question, Keith. I think consulting, it's all about launching projects. Programs, if you will. 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. Building for the future is requiring confidence. Confidence in the economic outlook, confidence in the business. There are parts of the world where that confidence is not at the level we expected. 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. That is probably what that is.
The level of confidence is not at the level we expected, and there is an eroding economic conditions in some parts of the world.
Okay. 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?
We think we do. We feel like we've got a reasonable range reflected in our guidance.
Okay.
Again, it reflects the learnings from the third quarter.
Let me ask my follow-up then is, 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? 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 a % of cash flow or a % of revenue growth that you're targeting as you think more broadly about acquisitions? That's it for me. Thank you.
Keith, I'll just quickly give you the answer on the quarter, which was it was less than 1%.
Okay, great.
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 a strategy we discussed with all of you during the IA days and recently. We will use acquisition as a way for us to invest in fast-growing areas. 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. We will continue to do so to make sure that through acquisition, we are capturing new waves of growth.
I'm particularly pleased with what we've been doing this year In that front. 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 Zenta, and we're very pleased, for instance, with the return we're getting from that acquisitions. It's true across the board.
Just another little data point for you, Keith, that we do expect it will be higher than the 15% of operating cash flow this year.
Yes. Okay, fair enough. Thanks, Pam. Good luck.
Thanks.
Thank you.
Sara Gubins 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. 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, the addition should ramp down into the next year.
Yeah, I think on the headcount, the first thing I would say, Sara, is that our headcount in the third quarter was very well-utilized. Our utilization rates were very high, as Pam indicated. If you think about the upper end of our range, in the fourth quarter, it's right at about what we just did in the third quarter. 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. We are 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 is managing our supply and demand. We'll continue to move our headcount, both the mix by location, total headcount, as our revenue forecast evolves.
We were up 5,000 and 4,000 in the GDN.
Yeah. It was all GDN. Almost all GDN.
Okay, thank you. 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.
Hi. 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&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. 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 strategy we want to execute, which is all around being extraordinarily focused. You mentioned finance and accounting as one of these area I could mention as well, procurement as an illustration, where we are taking some leading position and we are shooting for scale with good results. I mentioned one in my presentation today. We are as well investing in more in vertical. I mentioned Accenture Credit Services, where we're providing mortgage processing capabilities, regulatory disclosure with life sciences. Indeed, again, in addition to the at scale horizontal we've developed, we are executing exactly the same strategy in some priority industries with vertical insurance, banking, life sciences.
I could mention as well health.
Health.
No surprise that you've seen that these four industries posting good growth. 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. We talked about pricing a little bit, but are you seeing tightening up on the contract terms, maybe where the risk profile of the contract may be 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?
Yeah. It's the former. I think 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 used to do this work myself. These things just go through those kinds of periods, and it will certainly pick up again, but we do see that trend right now.
Okay. You mentioned analytics and so forth. As you know, some people talk about the new technologies, the SMAC 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. Indeed, it's an area of high growth for us. What we would put in this SMAC for us, that would be digital marketing, analytics, mobility, cloud.
Cloud.
These clearly are areas where we have something I would characterize as very strong growth.
Very strong growth. Yep.
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 become more early adopters.
Right.
Especially the consumer-based industries are more analytics, mobile, SMAC-driven, if you will. Communication, banking, insurance, consumer packaged goods, retail, this is where they are investing in the SMAC world.
Imagine that, Pierre talking SMAC.
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.
Yeah. 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 cost-cutting to more of a revenue growth focus.
I love the U.S. I love that market. I love the U.S. for Accenture for many reasons. First, it's a very large market for Accenture, as you know. Second, it's a market where we, again, posted double-digit growth this quarter, and probably for some very good reason. First, the overall economic environment in the U.S. is better than in the rest of the world. That's a fact. Second is, U.S. companies are, more than any other companies in the world, early adopters of new technologies. When you look at this famous SMAC, the creators of the SMAC are in the U.S., and the early adopters of these new technologies are more in the U.S. This is what's making the U.S. today a more vibrant practice for Accenture.
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 coming in below plan as you exit the year?
First of all, part of 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 true of our business, you always have some churn of resources, and that's healthy for our business. 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, is part of our profitability agenda as well, how we manage that headcount in the pyramids.
Okay. Got it. Thank you.
Okay. Thank you, Katy, and thanks to 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 our clients to transform their businesses. This is driving demand for our services. Yes, we've been challenged in few concentrated areas such as consulting in Europe, Brazil, and resources. We are running Accenture as a portfolio of business. 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 U.S., 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, supported by our 266,000 people, remains fully committed to driving profitable growth and delivering value to our clients and 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.
Ladies and gentlemen, this conference will be made available for replay after 7:00 P.M. Eastern today until September 26th at midnight. You may access the AT&T Executive Playback Service at any time by dialing 800-475-6701 and entering the access code 294684. International participants may dial 1-320-365-3844. Again, those numbers are 800-475-6701, access code 294684, and international participants may dial 320-365-3844. That does conclude our conference for today. Thank you for your participation in using AT&T Executive Teleconference Service. You may now disconnect.