Earnings Call: Q2 2011

Mar 24, 2011

Ladies and gentlemen, welcome to Accenture's Second Quarter Fiscal twenty eleven Earnings Conference Call. As a reminder, we are recording today's conference. And with that, I'd like to turn the conference over to Managing Director of Investor Relations, Casey McClure. Thank you, Doug, and thanks everyone for joining us today on our Q2 fiscal 2011 earnings announcement. As Doug just mentioned, I'm Casey McClure, Managing Director of Investor Relations. With me today are Pierre Narmterm, our Chief Executive Officer and Pamela Craig, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results. Pam will take you through the financial details, including the income statement and balance sheet, along with some key operational metrics for the the strategy. Pam will then provide our business outlook for the Q3 and full fiscal year 2011, 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, and 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. 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, our annual report on Form 10 ks and other SEC filings. For investors. We include reconciliation of those measures, where appropriate, to GAAP in our news release or on the Investor Relations section of our website at 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. It's a pleasure for me to be with you today on my first earnings call as Chief Executive Officer. I'm pleased to report that we had a very strong second quarter, continuing the good momentum of the past few quarters. Let me share a few highlights. We're generating outstanding new bookings of $7,000,000,000 our highest in 10 quarters, including our 2nd highest consulting bookings ever. Revenues were $6,000,000,000 exceeding the upper end of our guiding range. We had very strong growth in both U. S. Dollars and local currency across our operating groups and geographic regions. We delivered a very strong earnings per share of 0 point 7 $5 an increase of $0.15 or 25 percent over Q2 last year. Operating income was $772,000,000 an increase of 19% over last year and operating margin was 12.7%. And we continue to have a very strong balance sheet with a cash balance of $4,700,000,000 In addition, we just announced a semi annual cash dividend of 0 point payments for the year to 0 point 9 0 dollars per share. Our very strong results in the 2nd quarter, on top of our strong results in Q1 position us very well for the remainder of the fiscal year and give us confidence to raise our revenue and EPS outlook for the full fiscal year. Now I will turn the call over to Pam, who will provide some more detail on the numbers. Thank you, Pierre, and thanks to all of you for listening today. I am pleased to tell you more about Accenture's fiscal year 20112nd quarter financial results. We delivered strong bookings, revenue growth and EPS in Q2 and saw growing momentum in the business, while gaining market share. Year over year, local currency revenue grew double digits in both consulting and outsourcing, and our strong performance established in the first half of the year positions us well to deliver double digit top line I state otherwise, all figures are U. S. GAAP, except the items that are 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 $6,980,000,000 and reflect a negative 1% foreign exchange impact compared with new bookings in the Q2 last year. Consulting bookings were $3,800,000,000 and outsourcing bookings were $3,180,000,000 This level of bookings was the highest in 10 quarters. On bookings, in management consulting, clients are engaging us to them identify and create critical value in their businesses, driven by their needs to take out costs, to drive more top line growth or to change to meet new compliance requirements. We continue to see healthy demand for our offerings in finance and performance management, supply chain optimization, customer service effectiveness and sales and marketing transformation. Technology consulting bookings grew again this quarter. Our strength in this part of our business reflects our unique position in the technology ecosystem. Clients value our independence and skills in design and integration. There is significant activity in application modernization across our clients to rationalize the operations of their infrastructures through virtualization. And large companies are also engaging us to help with their cloud computing initiatives. Systems integration bookings were strong again this quarter and the highest in 10 quarters. The primary driver is ERP as clients are streamlining their operations and reducing their costs due to globalization, M and A and regulation. This work reflects implementations on SAP, Oracle and Microsoft platforms as well as package enhancements and add on industry specific software, including analytics that need to be integrated. Additionally, we see demand for web based applications and portals, including delivery on mobile platforms in order for clients to interact with their customers or e cost optimization remains paramount, and we continue to benefit from the vendor consolidation that has occurred over the last couple of years. We are being asked to expand in many clients where we already have an established footprint for more volume, more scope, expansions to new geographies as well as new work. Finally, BPO bookings were up significantly and reflected continued demand for our horizontal especially finance and accounting and for our industry specific solutions, particularly health and insurance. Now turning to revenue. Net revenues for the Q2 were $6,050,000,000 an increase of 17% in U. S. Dollars and 18% in local currency from the same period last year. These revenues reflect a foreign exchange impact of negative 1% compared with Q2 last year. These revenues were above our guided range of €5,600,000,000 to €5,800,000,000 a range that had assumed a foreign exchange impact of negative 2%. So adjusting for actual exchange rates, our revenues came in about $200,000,000 higher than the top end of the range we provided in December. Consulting revenues were $3,510,000,000 an increase of 20% in both U. S. Dollars and local currency. Outsourcing revenues were $2,540,000,000 an increase of 13% in U. S. Dollars and 15% in local currency. There was strong There was strong double digit revenue growth across the dimensions of our business. Before I get into the operating groups, let me note the record high revenues in the Americas, driven primarily by the United States, with Brazil and Canada also posting exceptionally strong year on year growth. Now turning to our operating groups. Resources revenues grew 25% in local currency this quarter and reflected exceptional growth in consulting. Consulting growth was driven by demand for ERP programs, global operating model design and rollout, supply chain optimization and smart grid projects. Similar to last quarter, outsourcing revenues are primarily for cost take out in IT and Financial Business Processes. In Financial Services, revenues grew 20% in local currency and were well balanced across all industry groups and reflected renewed strength in outsourcing. Our continued in the areas of business transformation, post merger integration and investment in core systems for banking, insurance and trading. Communications and high-tech revenues increased 16% in local currency and reflected strong growth in both consulting around the world. Consulting demand continues to be driven by cost takeout, customer acquisition and retention, web development as well as deploying new technologies to support growing wireless services demand. Outsourcing revenues in CNHT experienced very strong growth as well in Q2 as clients continued to be focused on cost takeout and improving operation efficiency. The products operating group had local currency revenue growth of 15% that was driven by very strong growth in consulting and was well balanced across the products industries. Management consulting and ERP continue to be major themes. More clients are beginning bigger ERP transformation programs, particularly in North America. Our products operating group is also doing some of our most pioneering and innovative work. Health and Public Service reduction services and for our offerings in back office transformation, health administration and electronic medical records. In U. S. Federal, we are seeing increased volumes on existing transaction based outsourcing contracts as well as increased demand for ERP services. Our progress to reposition our business in the public sector continues, particularly in EMEA. The 2nd quarter revenue growth in Health and Public Service was positively impacted significantly by the compare to Q2 last year when we had inefficient delivery on a contract. In summary, we continue to see revenue results that are evidence of healthy and balanced demand globally for our offerings across the industries we serve. Moving down the income statement. Gross margin was 31.7%, down from 32.7% in Q2 last year, a 100 basis point decrease. Our contract profitability was lower than the same period last year, particularly in consulting, as we continue our efforts to absorb higher annual compensation increases and subcontractor costs with improved pricing and a more efficient resource margin also includes the impact of higher recruiting and training costs from the addition of a larger number of new employees to meet demand. Sales and marketing costs were $710,000,000 or 11.7 percent of net revenues compared with $623,000,000 or 12% of net revenues for the Q2 last year. General and administrative costs were CAD435 1,000,000 or 7.2 percent of net revenues compared with $413,000,000 or 8% of net revenues for the Q2 last year. We continue to focus on driving efficiencies in our cost base as we grow our business. Operating 12 0.6% operating margin in Q2 last year. The operating margin in products was negatively impacted by lower contract profitability compared to the prior year as we have not yet fully recovered higher cost increases through pricing for our services and products. Products operating results were also impacted by expected lower margins on certain contracts. Our effective tax rate for the quarter was 20 6.9% compared with 27.8% in the Q2 last year. The lower rate this year was due to a number of factors that impacted geographic distribution of income. Net income was $566,000,000 for the 2nd quarter compared with 4 $62,000,000 for the same quarter last year, an increase of 22%. Diluted earnings per share were 0 point 7 increase of $0.15 or 25 percent compared with $0.60 in the Q2 last year. This difference reflects an $0.11 increase from higher revenue and operating results in local currency, a $0.03 increase from a lower share count, a $0.01 increase from a lower effective income tax rate, a $0.01 increase from higher non operating income, offset by a $0.01 decrease from unfavorable foreign exchange rates. Now let's turn to some key parts of our cash flow and balance sheet. Free cash flow for the quarter was $523,000,000 rounded, resulting from cash generated by operating activities of $601,000,000 net of property and equipment additions of $79,000,000 Turning to DSOs, our day services outstanding were 32 days, down from 33 days in the Q1 and up from 30 days in the same quarter last year. Our people continue to deliver very strong cash flow. Our total cash balance at February 28 was $4,700,000,000 versus $4,800,000,000 at the end of August. Turning to some key operational metrics. We ended the quarter with global headcount of more than 215 1,000 people, and we now have more than 122,000 people in our global delivery network. In Q2, our utilization was 86%. Attrition, which excludes involuntary terminations, was 14%, down from 15% in Q1. Lastly, we are on track to hire more than 64,000 people around the world this year. Before I turn things back to Pierre, I will comment on our ongoing objective to return cash to shareholders through share repurchases and dividends. In the Q2, we repurchased or redeemed approximately 3,600,000 shares for $177,000,000 at an average price of $48.90 per share. Year to date, we have purchased 18,300,000 shares for 7.90 $7,000,000 At February 28, we had $2,400,000,000 of share repurchase authority remaining. Earlier today, our Board announced the 2nd part of our semiannual cash dividend in the amount of $0.45 per share. This dividend will be paid on May 13, 2011. This is in line with the semiannual dividend of $0.45 we paid in November and represents a $0.075 or 20 percent increase over the dividend we paid in May of last year. Continue to expect to return at least $2,600,000,000 to shareholders through a combination of share repurchases and dividends in fiscal 2011. In summary, I am very pleased with our strong results in the first half of fiscal twenty eleven. We continue to be well positioned in the markets we serve as we go into the second half of our fiscal year. Now let me turn the call back to Pierre to give you his thoughts on how we are executing on our growth strategy. Thank you, Pam. Since becoming CEO on January 1, I've been meeting with our clients and our clients' service teams all over the world and across many different industries. And I'm hearing a very consistent story from our clients about the trends that are affecting their businesses and, as a result, driving demand for our services. Some of the key trends include globalization, which is driving more consolidation and fueling demand for our M and S services as well as demand for global operating model transformation Operational excellence to achieve greater productivity is driving demand for our core capability in ERP, process reengineering and technology rationalization. Increasing regulation is driving growing demand for risk and regulatory compliance activities, the development of new capabilities and to market, navigate new technology ways or enhance the customer experience, innovation is driving demand for next generation solutions. These trends to present tremendous opportunities for Accenture across our business, including in our core business, in the many new initiatives we've been focusing on and investing in and for our geographic expansion agenda. I am very pleased with our discipline and execution. We continue to drive the business with consistency and deep focus, and we are capturing profitable growth opportunities everywhere. Our client teams are incredibly engaged and committed to the success of our clients. Our people are executing exceptionally well across our business and geographies. We continue to bring the best of Accenture to our clients every day. Going forward, I feel good about our business and our opportunity to sustain strong performance. The world is changing at pace, and this is accelerating the change and performance improvement agenda for the industry leaders who know they have to act now to seize opportunity. And we are operating at the heart of our clients' businesses, tactical performance improvement to their business transformation agenda. Clients are increasingly turning to us for their most mission critical programs. It's very clear to me We are executing our growth strategy in a way that differentiates Accenture from the competition. We are bringing unique industry expertise. We are investing in differentiated offering and assets. We are riding the new technology waves. We are driving growth in both emerging and mature geographic markets, and we are recognized as the leading system integrator for ERP implementation. We've never been better positioned for the future. Now let me turn the call back to Pam, who will provide our business outlook. Thank you, Pierre. As a reminder, each quarter, we provide an outlook for the As we stated throughout this call, we are pleased with the strong results we delivered this quarter and for the first half of fiscal twenty eleven. In this ever changing environment, continue to be vigilant on the lookout for what may impact our business. Although events around the world may create more uncertainty going forward, we remain focused on helping our clients achieve higher performance and on delivering value for money, while managing our business tightly. That said, I would now like to share with you some thoughts on how we see the remainder of this fiscal year shaping up. For the Q3, we expect revenues to be in the range €6,300,000,000 to €6,500,000,000 which assumes a foreign exchange uplift of approximately 4% for the quarter. This range reflects the rates we've experienced over the past couple of weeks. Turning to the full fiscal year. We are now assuming a foreign exchange impact of positive 2% for the full fiscal year, which has trended up from the flat assumption we provided last quarter. Based on our year to date results of 16% revenue growth in local currency, the Q3 outlook I just provided and how we see the year as a whole, We expect growth to continue in most areas of our business, although moderating, particularly from the very strong growth we experienced in the Q2. We now expect our fiscal year 2011 revenue to be in the range of 11% to 14 percent growth in local currency. Results were stronger in Q1 and Q2 than we expected them to be, and we do see the latter part of the year more clearly this point. We continue to expect new bookings for the fiscal year to land in the range of €25,000,000,000 to 28 €1,000,000,000 This is a broad range that continues to reflect our outlook for future business, even though we have updated both our outlook for revenue growth and our foreign exchange assumption. The range also reflects, 1st, some scenario planning first, some scenario planning for how new bookings for Japan will land and second, some potential slight moderation in consulting bookings given that parts of our consulting business have been running very hot. Taking all of this into account, we currently expect that it's likely that our bookings this fiscal year will hit at least $26,000,000,000 We continue to expect operating margin to be in the range of 13.6% to 13.7 percent, a 10 to 20 basis point expansion over last fiscal year. You should expect some fluctuations quarter to quarter as we've seen in the past. We continue to expect our annual effective tax rate to be in the range of 28% to 29%. We are updating our outlook for earnings per share to reflect the increased revenue outlook and new exchange assumption. We now therefore expect EPS for the full fiscal year to be in a range of $3.22 to 3 $0.30 dollars an increase of $0.14 Finally, we now expect operating cash flow to be in the range of $2,800,000,000 to $3,000,000,000 property and equipment additions to now be $420,000,000 and free cash flow to continue to be in the range of $2,400,000,000 to $2,600,000,000 As we move into the second half of our fiscal year, we are positioned well to continue to drive top line and market share growth for our broad and durable base of services. We remain fully focused on profitability and the generation of strong cash flow, and we continue to be committed to return a substantial portion of our cash to shareholders over time. I will just take a moment now to thank all of the people of Accenture and particularly our people in Japan at this challenging time for them for their outstanding performance on behalf of their clients and Accenture. I look forward to seeing many of you in person at our upcoming Investor and Analyst Conference on April 14. Let's open it up now, KC, so that Pierre to one question and one follow-up to allow as many participants as possible to ask questions. Doug, would you provide instructions for those on the call? Our first question is from Tien Tsin Huang with JPMorgan. Congrats on the strong revenue growth here. Thank you, Tien Tsin. Pam, I want to ask the revenue upside in the quarter, I guess the upside. I'm curious, did you see a pickup in the month to month run rate as we cross the calendar year? Because obviously you set the guidance in December and the $200,000,000 of upside was quite large. So I wanted to ask about the timing of how that developed. Yes. Well, of course, in December, we didn't have any results yet for the quarter. So it may have ticked up a little bit in February, but it wasn't, I don't think real big across the quarter. Right. So relatively smooth. And then just my follow-up on the share repurchases, it was a little, I guess, light this quarter. It's the lightest actually we've seen in a while. So I know Q1 was pretty strong in terms of share repurchase, but anything to read into the lighter activity on the repurchases? Not really. I mean, our share repurchases were very high in the Q1. As you know, the markets went way up in the second quarter. Our stock hit an all time high a times, and we were intentionally a little less active. On a year to date basis, I think we're about where we want to be at this time, maybe 40%, and we still are on track to repurchase in the 3rd and 4th quarters and to return at least $2,600,000,000 even at current price levels. Got it. Well, looks like it was a good buy now. Appreciate it. Thanks, Pam. Thanks, Pierre. Thank you. Thank you. Our next question is from Darrin Peller with Barclays Capital. Yes. Thanks for the question. Hi. Just quickly on the gross margins, just the pressure from contractors, can you just describe a little more on how long you see that playing out? Yes, I mean, for hot skills, we always have contractor needs and those are higher now. And what we try to do over time is if we can, replace them with our people. And it's just again because things are running so hot, that's why we have this phenomenon right now, but we are focused on it because it is part of what we'll do in the latter half of the year to improve the gross margin. Okay. Just one follow-up. On the local currency outlook, obviously, we're happy to see that. How much does that incorporate Japan and other geographic risks that we've been seeing obviously develop? Well, Japan, if you look at our business, right, we're about 13% in Asia Pacific and Japan is, I don't know, roughly a third of that. And so it's not a giant part of our business. And actually, a lot of our work in Japan, Pierre and I were just talking with our leader there last night and some projects stopped, but have restarted. And there's been a handful of cancellations just because certain of our clients were very impacted by the earthquake and there may be some delays. So we've tried to factor in what we know at this point. Our Middle East business is we just have very little business there. So it's a negligible impact. Okay. That's great. Thanks guys. Thank you. Thanks. Our next question is from Adam Fish with Morgan Stanley. Thanks. Good afternoon. So Pierre after the quarter you just put up, I think it's time to consider retiring as CEO maybe and go right on top here. But seriously, if we look back over the last 10 years and prior 2 CEOs, Joe Forhan had the growth of the outsourcing business under his reign among other things and with Bill, we obviously had the growth of the GDN. 2 initiatives that really built on the core business of the company, but also changed it dramatically. So I guess, given that the quarter was pretty was obviously pretty good and the stock is reacting strong in the aftermarket. I thought I'd focus on a big picture question first. And Pierre, what's the big initiative that you want your tenure to be marked by? Yes. Thanks, Adam, for the question. And indeed, I do not plan to retire very soon. But I'm, of course, extremely pleased with our results in Q2, and it's definitely a strong start for me. You mentioned the GDN. You mentioned the core, you mentioned the outsourcing. Probably, I would mention the geographic expansion. You know what our plan to move from a little bit west to east and north to south, and this is definitely an agenda where I'm putting a lot of attention. And to be honest, I'm extremely pleased with the progress we are making so far with that agenda, which is very important for Accenture. So if I had to mention 1, this is probably the one I would mention. Okay. And then the second question I had is my follow-up. We tracked and wrote about a spike in your job postings during the quarter. What areas are you hiring most aggressively, whether it be skill set or geography? And Pam, you said you're running hot in a bunch of places. So what areas are there? And you mentioned a bunch of things, but if you could just focus in on the hiring areas, that would be helpful. Thank you. Maybe I can jump on this one as well. Sure. Because we are probably hiring in the different dimension of our business, to be honest. So that's probably the good news and why I'm so pleased with our results because we see growth from the multiple dimensions in our different businesses, operating group as well our geographic units, if you will. Now we continue to be aggressive in hiring in our GDN given the demand in system integration and our will to continue moving our walk off shore to make sure we are remaining extremely competitive in the marketplace. But front of our clients highly differentiated skills and caliber and talents, if you will, probably with more focus on management consulting, deep experts in technology consulting as well as probably the best technology architects. So this is where we are making our hiring. But of course, we are seeing extraordinary robust in the GDN and the offshore from a number perspective, if you will. Okay, great. Thank you very much. Appreciate it. You bet, Adam. Thank you. Our next question is from Rod Bourgeois with Bernstein. Hey, guys. Hi, there. Hey, is it safe to declare that we've now moved into a demand phase where more transformational services are now in vogue? And if you believe that's the case, which would be a great thing since Accenture is very differentiated in that part of the market, What's your sense for how long that transformational demand phase will last? My answer would be first, I mean, good afternoon, Rod and thanks for participating in your question. Yes, I would say we see more transformational work. Now let me define what we mean with transformation because sometimes we mean transformation equal very large jobs. What we mean by transformation is probably what I would qualify as mission critical, things our clients are doing to change the trajectory of their business and to be more competitive in the marketplace. And it might not be a question of size. It's more a question of the quality of the work. And indeed, if you accept that definition, if you will, yes, I personally see more of those with our clients. That would be my point, number 1. Point number 2, is it kind of durable? Is there a pattern there? Frankly, I've been meeting with many clients from Asia to Europe and Europe to North America. And as I mentioned previously, we're just amazed, to be honest, with the consistency of the trends that have been reflecting to me. All these globalization, regulation, innovation, operational excellence, and you can add a couple of other things around digitalization that the new technology wave. If you put all of this together, yes, I believe those trends are probably durable and should drive the demand because there is a need for our clients to move now. And I mentioned to act now as they first see the opportunity to grow in the marketplace and they need to see those opportunity in order to drive their business. And at the same time, they continue to rationalize their operation and to be more effective. And I think those are big trends, to be honest. Now we're going to watch that carefully over time to see how it's going to evolve, but I think those are underlying big trends. Great. I would just add just one thing. We did have 8 deals over €100,000,000 this quarter. And again, we see a continuation of the pattern that there's more transformational work, but being arranged in more manageable chunks. So that trend also continues. Great. Well, I think investors will give you credit for the nice growth that's coming through. But in light of the growth, Pierre, are there a certain set of risks that you need to manage more closely, maybe more closely monitoring for problem contracts and execution on deals. And also related to the question business? Ability to expand margins? Will you see some leverage in the business or will that all be offset with the need to pay higher bonuses and wages? So how do you think about the risk and the margin equation here? Yes. Thanks, Rod. At the end of the day, growth is a good problem to have and to deal with. So but indeed, I mean, there are things you need to get right when growth is back. And the first is indeed to get right talent and the right people on board. I mean, this is what we've been doing this last, frankly, 6 months, even more. And we need to make sure that we continue in retaining. I'm very pleased to see that our retention is better. And so our attrition is a little bit lower, which is good for us. But it's probably certainly an element of attention for us in the business we are. I mean, the second point is we will never trade execution risk against growth. So our job is to monitor that business extraordinarily tightly and to make sure indeed we are capturing the best perspective, it's probably more around the people, perspective, it's probably more around the people and our ability to continue hiring, training and deploying the people. Over time, we mentioned our guidance regarding the margin. I think we are comfortable we will deliver against our guidance. Bethany? I mean, I think the phenomenon of how fast it seems for us, which was more than we expected, And this year salary increases were significantly more than last year's, right? And then we did have bonuses coming out of last year. So the compare there was tougher from the standpoint of managing that turn. Now in the second half of the year, that does the heavy lifting on that is behind us. And so we feel good about that, Rod, as we continue through the year here. Great. Thank you, guys. You bet. Thank you. Thank you. Our next question is from Tim Fox with Deutsche Bank. Hi, Tim. Hi. Thanks for taking my question. The first about where you're seeing most of that market share gain, whether it be in the consulting or outsourcing business or any particular trends that we should look for? And how is it that your ability to gain market share is improving here as the market improves overall? Yes. I mean, just in we do see really good market share growth in both consulting and outsourcing, in both management consulting as well as what we do in technology. And so really it's across that, just in terms of the numbers. But let me let Pierre give you some color. Yes. Market share I mean, thanks, Tim, for the question. I mean, this is a very important element. I mean, market share is a sign of whether we are driving a healthy business and we are doing better than the competition. And at the end of the day, indeed, we are very pleased with where we are because we are gaining market share in most of the business we are operating in as we speak, which I think for me is a very important signal around our differentiation. Are we different from our competitors? Are we bringing something unique, which is really resonating with our clients? Are we relevant in the business? And the answer seems to be yes. So we are monitoring that very carefully. I'm pleased with the fact that we are gaining market share in management consulting, but as well in outsourcing and system integration, which is an extremely competitive market, as you know. And again, I think this is an illustration that in this highly competitive market, we are not moving ourselves to the commodity world, but we're still bringing some differentiation in what we do, and that differentiation is recognized with our clients, and we are gaining market share, which is extremely important for us. Great. And the follow-up would be relative to the competition and pricing, you mentioned very strong growth in bookings for BPO in particular. Could you just comment on how the pricing environment is shaping up in the recovery here? And we've heard some significant pressure on some of the larger BPO competitive bids out there. So any color you could provide on the pricing environment would be helpful. Yes. I mean, I think you're exactly right, Tim. I mean, it is still competitive out there. There are some places where we do have some definitely stabilizing. I think we have evidence of this. Now if we are looking in just the recent past or as we speak, we're starting to see sign of pricing improvement. So we need a little bit more time to figure out whether it's going to be a kind of durable pattern. But I would say stabilizing, yes, early sign of improvement in the marketplace in some of in pocket of the market we are doing. Our question is from George Price, BB and T Capital Markets. Mr. Price, your line is open. Is your mute button on? Great question. We'll go ahead on to the next questioner then. Please re queue. Our next question is from Julio Contreras with Goldman Sachs. Hey guys, good afternoon. Hi, Julio. So just a couple of quick things, I guess, as it relates to margins and thinking about this more longer term. I think where you guys currently stand, your utilization is running really hot. Not sure that that's a big benefit to margins going forward. But it feels like attrition is improving wages, seem like at least we're over that big hump in terms of the spike up in wages and potentially pricing could benefit the model. So as we're thinking about margins longer term, Pam, any sense on what other puts and takes to think about for the margin profile as we move into fiscal 2012? Yes. I mean the ones you mentioned are certainly on our minds. And I think just picking up some of the other pieces of operating margin, we continue to look to hold the line as much as we can on G and A costs as we grow. We continue to look for ways to be more efficient in our selling and we have continuing programs being led by our COO on that. And I think in contract margins, right, to be forever focused on cost to serve. And how do we always look for productivity and efficiency in terms of how we do that as well as pricing power where we're really getting the differentiation. And as Pierre is certainly establishing leadership for us, I mean, that's clearly going to be more and more our focus. So I think those are the places where we continue to have opportunity. And as you know, I'm we also need to invest in the business and those investments primarily go through the P and L. So that's why I've been focused on modest margin expansion, so that we can indeed continue to make those investments and yet at the same time post up modest margin expansion over time. Maybe just one follow-up on two quick points. How are you guys thinking about the offshore contribution or global delivery? That's now 56% or 57% of your headcount. When does that begin to sort of show up, I guess, in terms of margins? Or is it kind of helping, but it could be more if you weren't investing just trying to think sort of that part specifically. And then longer term what is the thinking around leveraging more platforms, more IP, maybe thinking about that in the way of, I guess, nonlinear context for margin expansion as well? Yes. So I will pick up on that one and thanks Rodrigo, for the question. I mean, indeed, we want to continue investing in differentiation. I mean, that's something which is very important for us, differentiation and competitiveness, those are the kind of 2 key pillars, if you will, of in everything we do. In order to differentiate, indeed, we need first to have the best qualified people, and I mean onshore, as I mentioned before, with extremely deep and unique skills as necessary to put in front of the client, but we need to continue expanding the global delivery network and now offshore. And it's kind of permanent dynamic we're trying to strike right, growing on both sides. So I think we will definitely continue to grow our offshore people. Now in order to drive more differentiation, indeed, we need to bring in our solutions and offerings something different. And you mentioned asset IP. I think that's something I referred to as well. I'm probably a big fan of this. This is something I've been driving to could do, we can make that happen. And I can refer to the recent acquisition we've been making in Germany, a software solution called CAS. I don't know whether you've seen that one. But I think it's an extremely good illustration of what we want to do when we are talking about targeted tuck in acquisition in asset in order to drive differentiation. I think this acquisition is telling all. I can elaborate on this if you will, but it's about I mean, this acquisition, it's all about customer relationship management with a big focus on trade promotion in consumer products. When we mean focus, this is what we mean, taking an high growth industry consumer consumer good, understanding where we can make the difference, trade promotion because it's going to create value and outcome for clients. How we can do that? We are targeting that company, which fits exactly the purpose, bringing asset and IP. The competition can't match and can't copy. We're putting that in the context of our system integration solution, bundled with management consulting, taking kind of French language, if you taking kind of French long wind, keep you up. Yes. That makes sense. And I guess just in terms of numbers, could you put any numbers around how big that would be as a part of your business today? Or if not, maybe we can I guess we can wait till April to get some sense on that, but that actually would be very helpful to get some sense on what percentage of your business is actually leverageable that way today? Yes, it's a small but growing part. Our next question is from the line of Joseph Foresi with Janney Montgomery Scott. Hello, Hi. Nice results today. I had a question just I think in your preliminary comments you talked about outsourcing maybe moderating in the guidance towards the back half of the year. How should we think about it? Was there some lumpiness in some contracts this quarter? Did it come in faster than you were expecting? Maybe you could just help us understand the momentum of the general business. Yes. I think it's more just the moderation of the year over year growth rate, more than anything else and just intended to say that we expected that, but nothing really lumpy. I think it's more in the compare. Okay. And then maybe you could just talk broadly about sort of obviously this is was a very good quarter. As you head towards the back half of the year, I know we talked a little bit about Japan and maybe you could give a little more color on the U. S. Government. But maybe you could talk about just what do you have for any concerns that you have in the business right now as you look at sort of the second half of your fiscal year? I mean, I will let Pam comment on U. S. Because she's definitely a specialist on this. Yes. But I mean, more broadly, I mean, you've seen our guidance. We're updating the guidance, which is demonstrating that we believe in the growth. We believe in the momentum in the marketplace. We believe that our clients are investing, and we have opportunities in front of us. We as well looking at the global environment. We're not blind. We understand what's going on in the world. We are all traveling, including myself, the world to understand what's going on and to have information firsthand, if you will. We are taking all that input. We're talking with our clients a lot. We're talking with our clients' team. We're understanding the world dynamic, and then we have put our best estimate for what be our 2nd part of the year. And we feel good about the guidance we are giving to you today. Yes. Just on federal, that's roughly 5% or 6% of our business. And I guess continuing resolutions have become a way of life for us here in the U. S. I mean, if it shuts down for a few days or something, it would not have an impact on us. But I think in the unlikely event that there was an extended shutdown that it would, but we're not expecting that and we factored in to be able to handle a few days. Okay. Thanks. Thank you. Our next question is from Ed Caso with Wells Fargo. Good afternoon. Thank you. I was curious if you could give us an update about the United Kingdom. Obviously, they did some changes in their approach last summer and brought all the larger providers in and pat them down. How is business now starting to pick up again and maybe some areas of focus that you could talk about? And Ed, you mean in the public service business, We do see our business actually returning nicely in the U. K. We had a good double digit growth in the quarter. It was driven primarily by the commercial operating groups. And we are repositioning there in terms of our public service business. But we do have some good opportunities there and are working it. And I was at. And I was curious, it looks like you're on track to distribute roughly the amount of cash that you generate in the year, but you have almost $5,000,000,000 on the balance sheet. Has there ever been thought of maybe a special dividend? Well, we work with our Board every year on the dividend. And again, I think we're more in the vein of developing the balance of share repurchases and dividends over time versus doing special stuff. And we'll be working again with them coming up here as we look at our dividend planning for next year. Thank you. Okay. Doug, we have time for one more question and then Pierre is going to wrap up the call. Very well. We'll go back then to George Price with BB and T Capital Markets. Hi, thanks very much. Apologies for the earlier technical difficulties. No problem, George. Welcome back. Thanks, Pam. It's nice to be back. Wanted to, 1st of all, congratulate you on great results. It's really fantastic. There I did drop for a period, so a couple of things may have been asked. I apologize for that. But I wondered if you would just on the segment operating margin side, could you go into a little bit more detail about kind of what was going on with the product margin, down 9%, down from double digit levels for quite a period of time. I think you mentioned a little bit in your commentary about some contract issues, but I wondered if maybe you could give some more color to that if you hadn't already. Yes. I mean part of the products portfolio, and just part of it, right, I would say, was more challenged just in terms of absorbing these salary increases and sort of getting the right resource mix and pricing than the others. And so that did impact them this quarter. We also intentionally had planned for Accenture. Okay. What about, I guess, on the other hand, I'd say it was nice to see Health and Public Service, the operating margin continuing to move up, hitting 9% now. Do you think that business is on track to get back to double digit operating margin in the second half? No. The Health and Public Service, I mean, it was we're still doing the repositioning there. And we did say it would take this year and do expect that it will. So we had a good margin result this quarter, but I do expect it to continue to be single digits this year. Okay. Wait, one second, Pierre is going to add some. Yes. No, I mean, this is where we are from a profitability perspective. But I would like to acknowledge the work which is being done with our leadership in HPS with Steve Rolledder because, I mean, the H part is doing extremely, extremely well. As you remember, we presented in the last investor conference that we had a kind of plan around growing health. And we are executing against that plan, and we are very pleased with the results so far. Regarding PS Indev, we are repositioning that business, executing. We have the right leadership in place, and I'm sure we're going to executing. We have the right leadership in place, and I'm sure we're going to drive the right outcome. Yes, it's going quite well. And if I could just add maybe one more. Any potential I mean, obviously, with all the cash flow that you have, any potential for a stepped up M and A to use the cash that way at all? I mean, I guess another way to ask it is, do you feel that you have what you need right now to continue to grow as well as you're growing organically? Or do you think that acquisition over the next year or 2 might play more of a role in your use of cash? Thank you. Yes. I mean, on this one, and I think we are demonstrating that for few quarters, our DNA has a lot to do with organic growth. I think we are doing organic growth better than anyone else. I mean, for the simple reasons that there are opportunity to grow organically in different parts of the world and different parts of our business. And we will never trade organic against inorganic. Organic growth is good. It's driving good business. It's driving good cash, and it's positioning us very well. And so we can return some cash to people like you. Now indeed, we are looking at acquisition in a way that's going to differentiate. We're not going to make us different. I mentioned this CAS acquisition. We're at what's going to make us different. I mentioned this cash acquisition. We're probably going to make other, but exactly with the same period to make us different from the competition and bring something unique to our clients in a way that will complement our organic growth. Cash is precious, and we're going to take a lot of care of it. I mean, what we're trying to do is sharpen the strategy where we can do these focused tactical tuck ins, right? I think we can do that a little better, but it's not going to change the rigor or the evaluation, but just more I think we'd like to see a little bit more focus in some certain areas. So we have so we are doing that. But in the end, these things are hard to do. And we only want to do the right Great. Congratulations again. Thanks very much for taking my question. You bet, George. Thanks. Okay. Thank you for joining us on the call today, and thank you very much for your questions. As you heard, we continue to see solid momentum in our business, and we are well positioned as we enter the second half of our fiscal year. Frankly, much of the credit for our strong results goes to the incredibly talented team of more than 250,000 men and women around the world. As I want to specifically acknowledge the dedication and commitment of our people in Japan, who despite the most difficult circumstances, have continued to serve our clients during a very challenging period. I'm also very proud that in true Accenture fashion, Accenture people around the world have mobilized to support our colleagues in Japan. In closing, I feel very good about our business. I strongly believe that in this fast changing environment, we have the right positioning, we have the right strategy, we are executing at at at our Investor and Analyst Conference next month in New York. If you have any questions, please feel free to call Casey to make arrangements for follow-up. All the best. Thanks. And ladies And ladies and gentlemen, today's conference call is being made available for replay starting today at 7 p. M. In the Eastern Time Zone. It will run until June 20 3, 2011. You can access our service by dialing 1-eight hundred-four seventy five-six thousand seven 1 within the U. S. Or outside of the U. S. At 320-365-3844.