Earnings Call: Q3 2017

Jun 22, 2017

Welcome to Accenture's Third Quarter Fiscal twenty 17 Earnings Call. At this time, all lines are in a listen only mode. Later, we will conduct a question and answer As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Thank you, Ryan, and thanks everyone for joining us today on our Q3 fiscal 2017 earnings announcement. As Ryan just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nontorme, our Chairman and Chief Executive Officer and David Rowland, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet for the Q3. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the Q4 and full fiscal year 2017. We will then 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, including our business outlook, are forward looking and as such are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10 ks and quarterly reports on Form 10 Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During today's call, we will reference certain non GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now, let me turn the call over to Pierre. Thank you, Angie, and thanks, everyone, for joining us today. This was another strong quarter for Accenture. We delivered revenue growth in the upper end of our guided range and again gained significant market share. I'm particularly pleased with our very strong new bookings for the quarter year to date, which demonstrate that our services and capabilities continue to be both highly relevant to our clients and very differentiated in the marketplace. We generated very strong cash flow for the quarter and returned substantial cash to shareholders, all while continuing to make significant investments to drive future growth. Here are a few highlights for the quarter. We delivered excellent new bookings of $9,800,000,000 We grew revenues 7% in local currency to $8,900,000,000 with broad based growth once again across the different dimensions of our business. We delivered earnings per share of $1.52 on an adjusted basis, a 8% increase. Operating margin was 15.5% on an adjusted basis, consistent with the Q3 last year. We generated strong free cash flow of $1,700,000,000 and we returned approximately $1,400,000,000 in cash to shareholders through share repurchases and the payment of our semi annual dividend. So, we had another good quarter. And as we enter the Q4, I feel very confident that we are well positioned to deliver our business outlook for the year. Now, let me hand over to David, who will review the numbers in greater detail. David, over to you. Thanks, Pierre, and thanks to all of you for joining us on today's call. As Pierre mentioned, we were pleased with our Q3 results, which were in the range we expected and position us very well to achieve our full year financial guidance. Before I get into the details of the quarter, I thought it would be useful to highlight how we're delivering on an essential aspect of our growth strategy and our model for driving superior shareholder value. You've heard me say many times previously that our growth strategy was conceived with an important objective in mind, which is to create durability in our revenue growth at a level which is consistently above market, thereby taking share and strengthening our position as a market leader. And against that objective, we've created a diverse business that spans 13 industry groups, 15 geographic markets, 5 businesses, which has created a powerful growth model in both scale and durability. Our 3rd year and year to date results our Q3 and year to date results are a good illustration of our growth model in action, where being a market leader across many dimensions of the market has resulted in consistent growth levels that we estimate are more than 2 times the rate of growth of the basket of publicly traded companies. And importantly, we've delivered these results in a highly dynamic environment, which is exactly the way our growth strategy is intended to work. With that said, let me also comment on a few of the highlights in the context of our 3 financial imperatives for driving shareholder value. Our net revenue growth of 7% in local currency in the 3rd quarter continued to be highlighted by strong double digit growth in all three areas of the New, including digital cloud and security related services. We continue to see positive growth in most geographic markets and industries. And while we saw encouraging signs in several areas of pressure previously noted, we did continue to be very pleased with momentum in Europe and the Growth Markets, which combined delivered 10% growth in the quarter. Operating margin on an adjusted basis of 15.5% in the 3rd quarter was consistent with last year and resulted in 20 basis points of expansion on a year to date basis. This level of margin expansion continues to include significant investments in our business and our people. And on a year to date basis, we've delivered very strong earnings per share growth of 10% over FY 'sixteen adjusted EPS. And free cash flow of $1,700,000,000 in the quarter and $2,700,000,000 year to date keeps us on a trajectory to deliver free cash flow in excess of net income for the full year, while returning at least $4,200,000,000 cash to shareholders through repurchases and dividends. And we continue to invest significantly to acquire scale and capability in key growth areas with a year to date capital investment of $1,200,000,000 across 7 transactions. So we're pleased with our overall results in the 3rd quarter, which continue to demonstrate the durability of our growth, profitability and cash flow. With that said, let's get into the details of the quarter starting with new bookings. New bookings were $9,800,000,000 for the quarter. Consulting bookings were 5 point $2,000,000,000 with a book to bill of 1.1. Outsourcing bookings were $4,600,000,000 also with a book to bill of 1.1. We were very pleased with our new bookings, which represent 8% growth in local currency, reflecting the 2nd highest level of new bookings in our history with a record high in consulting bookings. Turning now to revenues. Net revenues for the quarter were $8,870,000,000 a 5% increase in USD and 7% in local currency, reflecting a foreign exchange headwind of approximately 2% compared with a 2.5% impact provided in our business outlook last quarter. Our consulting revenues for the quarter were 4 point 8 $1,000,000,000 up 4% in USD and 6% in local currency. Outsourcing revenues were $4,000,000,000 up 6 percent in USD and 7% in local currency. Looking at the trends and estimated revenue growth across our 5 business dimensions, growth was led by operations, which posted double digit growth for the 6th consecutive quarter and application services, which delivered high single digit growth. Both operations and application services growth was fueled by significant rotation to the new. Strategy and consulting services combined continue to grow low single digits. Across those businesses, the dominant driver continues to be strong double digit growth in the New with all three components, digital cloud and security growing double digits as well. Taking a closer look at our operating groups, Sotix led all operating groups with 15% growth, driven by strong growth across all industries and geographies, led by consumer goods, retail and travel services. Financial services grew 6% in the quarter, driven by strong growth in banking and capital markets globally, and overall strong growth in both Europe and the growth markets. Resources grew 4% and returned to positive growth this quarter as expected, reflecting growth across all geographies. Globally, we saw very strong growth in Chemicals and Natural Resources and good growth in Utilities, while the challenges in Energy continued. Communications, Media and Technology also grew 4%, reflecting strong double digit growth in software and platforms, which more than offset roughly flat growth in the other two industries. We saw solid overall growth in North America and very strong growth in the growth markets, partially offset by continued contraction in Europe. Finally, H and PS came in lower than expected at 2% growth as we did not see the uptick that we anticipated in both public service and health in North America. Our North America business was negatively impacted by slower than expected decision making and initiation of new projects due to continued uncertainty on healthcare legislation and state and federal budgets. We now expect these factors to continue to impact our business at least through the Q4. Moving down the income statement, gross margin for the quarter was 32.8% compared to 31.9% in the same period last year. Sales and marketing expense for the quarter was 11.1 percent, consistent with the Q3 last year. General and administrative expense was 6 0.2% compared to 5.3% for the same period last year. This quarter, we recorded a settlement charge related to the termination of our U. S. Pension plan consistent with my comments in March. This $510,000,000 charge decreased quarter 3 operating margin by 5.70 basis points, lowered our quarter 3 tax rate by 7.2% and decreased net income by $312,000,000 and diluted earnings per share by $0.47 The following comparisons exclude this impact and reflect adjusted results. Operating income was $1,400,000,000 in the 3rd quarter, reflecting a 15.5 percent adjusted operating margin, consistent with quarter 3 last year. Our effective tax rate for the quarter was 26.6 percent compared with an effective tax rate of 26.5% for the same period last year. Diluted earnings per share were $1.52 compared with EPS of $1.41 in the Q3 last year. Our day services outstanding were 41 days compared to 42 days last quarter and 41 days in the Q3 last year. Free cash flow for the quarter was $1,700,000,000 resulting from cash generated by operating activities of $1,800,000,000 net of property and equipment additions of $136,000,000 Our cash balance at May 31 was $3,400,000,000 compared with $4,900,000,000 at August 31. With regards to our ongoing objective to return cash to shareholders in the 3rd quarter, we repurchased or redeemed 4,900,000 shares for $589,000,000 at an average price of $120.50 per share. At May 31, we had $3,700,000,000 of share repurchase authority remaining. Finally, as Pierre mentioned, on May 15, 2017, we made our 2nd semiannual dividend payment for fiscal 2017 in the amount of $1.21 per share, bringing total dividend payments for the fiscal year to approximately $1,600,000,000 So with 3 quarters in the books, we feel good about our results to date and we're working hard to deliver quarter 4 and another successful year. Now let me turn it back to Pierre. Thank you, David. Our strong results for the quarter year to date demonstrate that we continue to execute very well against our growth strategy. We are successfully driving the business transformation of Accenture, while at the same time consistently delivering above market performance. Today, the breadth of capabilities we provide end to end is truly unique in the marketplace, and we are well positioned to compete at scale in each of our 5 businesses, driving synergies across them to deliver value and business outcomes for our clients. We continue to rotate our business to the new digital, cloud and security related services, which again grew at a very strong double digit rate in the quarter and now account for 50% of total revenue. I am absolutely delighted that we have achieved a significant milestone for our business so rapidly. Our rotation to these new high growth areas, the differentiation of our capabilities in the market and the diversity of our business have enabled us to continue to gain significant market share. The need to go digital remains a top priority for our clients, and we're investing aggressively to drive innovation and deliver digital transformation. A great example is the capability we have built in Accenture Interactive. And I am again delighted that for the 2nd year in a row, Advertising Age has named Accenture Interactive the largest provider of digital marketing services, both globally and in the U. S. Accenture Interactive is working with many of the world's leading brands to transform the customer experience. As an illustration, with Carnival, the cruise operator, we are helping develop a new platform using wearable technology, the Internet of Things and analytics to transform the guest experience with intelligent personalization. Carnival will be able to anticipate every passenger's preferences, likes and needs, and we continue to broaden the services we provide through Accenture Interactive. In the Q3, we acquired 2 creative and design agencies in Australia, The Monkees and Mogul, and we acquired Kutzmann in Belgium to expand our digital and user experience capabilities. In today's digital and highly connected world, security is essential, and we are building a market leading security capability to help clients become more resilient. I'm pleased that in the 3rd quarter, we saw very strong double digit growth in our security business, and we are bringing deep and differentiated expertise to our clients. We are working with a California based utility to protect its critical assets, including nuclear power plants through expertise in cybersecurity as well as identity and access management. Increasingly, the work we do is enabled more and more by new IT, including automation, robotics and intelligent platforms. We are helping a global healthcare company embrace digital across its entire enterprise. Our team is using Accenture MyWizard, our intelligence automation platform, to improve application quality and productivity. We are working with the U. S. Transportation Security Administration to modernize their enterprise applications using agile and DevOps software development. And during the quarter, we expanded our capabilities in intelligent automation with the acquisition of Gen4 in the UK, and earlier this month, we acquired SolutionIQ, a leading provider of agile services, adding some of the most experienced agile coaches in the industry to our team. We continue to hold a unique position in the technology ecosystem as the leading partner of both the established providers and emerging players. Just last week, Microsoft named Accenture, its SI Partner of the Year for the 10th year in a row. In May, we received 3 SAP Pinnacle Awards, more than any other company, for our work helping clients design, deploy and manage SAP enterprise systems. And we have expanded our collaboration with SAP to co innovate, co develop and jointly go to market with new solutions that combine our industry expertise and analytics capabilities with SAP Leonardo, a new system that integrates digital technologies, including machine learning, analytics and Internet offering. Turning now to the geographic dimension of our business and our results for the quarter. In North America, we delivered driven growth of 3% in local currency, driven by United States. As David mentioned, this was below our expectations, given the increased uncertainty in the marketplace in health and public service related to health care legislation and state and federal budgets. In Europe, I am very pleased that we had another strong performance, growing revenue 9% in local currency, driven primarily by double digit growth in the United Kingdom, Germany and France. And in gross market, we delivered another excellent quarter with 13% growth in local currency, led by very strong double digit growth in Japan as well as double digit growth in Australia as well as in Singapore. Before I hand it back to David, I want to take a moment to acknowledge some of the external recognition we have received for our brand and differentiated strategy. And again, we never take this for granted. I am delighted that for the 12th year in a row, we were recognized on Bronzy's list of the top 100 most valuable global brands. And for the 6th consecutive year, we were including Forbes ranking of the top global brands. We improved our rankings and drove significant increases in brand value on both lists. And for the 2nd year in a row, we were among the top 25 companies on the Barron's 500, and we were also included on Barron's list of most respected companies. I strongly believe that over the years, we have built a durable business model for Accenture based on 2 major building blocks. 1st, our accelerated rotation to the new, which enhances our relevance to clients and second, our highly diverse portfolio of business, which enables us to drive durable performance over cycle of uncertainty and volatility. And that is why, looking ahead, I remain very confident in our business strategy and our market position. With that, I will turn the call over to David to provide our updated business outlook. David? Thank you, Pierre. Let me now turn to our business outlook. For the Q4 of fiscal 2017, we the impact of FX will be negative 1.5 percent compared to the Q4 of fiscal 2016 and reflects an estimated 5% to 8% growth in local currency. For the full fiscal year 2017, based upon how the rates have been trending over the last few weeks, we now assume the impact of FX on our results in U. S. Dollars will be negative 1% compared to fiscal 2016. For the full fiscal 2017, we now expect our net revenues to be in the range of 6% to 7% growth in local currency over fiscal 2016. For operating margin on an adjusted basis, we now expect fiscal year 2017 to be 14 point 8%, a 20 basis point expansion over fiscal 2016 results. We now expect our annual effective rate on an adjusted basis to be in the range of 22.5% to 23.5%. For earnings per share on an adjusted per share, on an adjusted basis, we now expect full year diluted EPS for fiscal 2017 to be in the range of $5.84 to $5.91 or 9 percent to 11% growth over adjusted fiscal 2016 results. For the full fiscal 2017, we continue to expect operating cash flow to be in the range of $4,600,000,000 to $4,900,000,000 property and equipment additions to be in the range of $600,000,000 and free cash flow to be in the range of 4 $1,000,000,000 to $4,300,000,000 We continue to expect to return at least $4,200,000,000 through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by slightly more than 1% as we remain committed to returning substantial portion of cash to shareholders. And finally, for the full year, we now expect to invest in the range of $1,800,000,000 in acquisitions. With that, let's open it up so we can take your questions. Angie? Thanks, David. I would ask that you each keep the one question and a follow-up to allow as many participants as possible to ask the question. Ryan, would you provide Our first question will come from the line of Tien Tsin Huang with JPMorgan. Please go ahead. Hey, good morning. Thanks. Just let me start by asking about bookings. Bookings were good in line with where we were at. You said it would improve in the second half, it did in the 3rd quarter. Do you expect that momentum to carry into the 4th quarter? Have you replenished the pipeline, etcetera, going into 4Q? Yes, we feel hey, Tien Tsin, by the way, we feel good about our bookings position in the Q4 and we expect to have another very good quarter of bookings. So we think that momentum does continue. Okay. And then on just the new revenue here versus the, I guess, you want to call it legacy or the non new, any surprise in the trend there? Just thinking about the math and if there's been any change in momentum in either? No. I would say on that front, it's really been more of the same. Our growth in the new continues to go at very, very high levels, well above 30% growth in the quarter, which is what we've seen pretty consistently this year. The market demand is tremendous and it plays extremely well to the investments that we've made over the last several years now and building capabilities to be the leader in that part of the marketplace. So we're extremely pleased. It is broad based literally across our operating groups, our 15 geographic units. And if you look at the 3 components of digital cloud and security, again, very strong double digit growth really across the board. So we couldn't be more pleased with what we see in that part of our business. Thank you. Thank you. Next question comes from the line of Edward Caso with Wells Fargo. Please go ahead. Hi, good morning. Good morning, Ed. Yes. I was curious about your efforts on the acquisition front. Obviously, you're providing all your cash flow back to investors and therefore using the cash on your balance sheet to fund your fairly aggressive acquisition program. At what point do you hit a level where you desire to have your cash? Well, I think we and we've talked about this before, Ed, that we are fortunate in that with the strength of our overall financials, including our balance sheet, we have a lot of levers at our disposal as we manage our business really for many years to come. When we look at our need to acquire critical skills and capabilities and important growth areas in the market, we don't see that changing certainly over the next 3 years. So we think that's going to continue to be an important part of our investment strategy. We think it will be an important part of an engine for growth overall and ultimately for us, as you know, this is all about quickly assimilating these capabilities and driving organic growth over time. So we really see more of the same with our acquisition strategy going forward and we think we have the financial flexibility to accommodate that while also returning cash to shareholders. Yes. I mean, not much to add. I think we have an extremely clear strategy at Accenture, which is all about rotating to the new. And in order to enable this strategy, we set very clear financial context we shared with all of you on how we're going to allocate our cash and the free cash flow with the spread, at the same time, investing more than ever to the transformation of Accenture to build the relevant services of the future and create durable performance over the next cycle of change and at the same time continuing with a very, I guess, very good return to shareholder approach, both in term of share buyback and in term of dividends. We believe that this strategy is doing very well. And as David mentioned, we still have opportunities to invest even more should that be required, leveraging more our balance sheet one way or the other. So I feel extremely good with where we are from an investment standpoint, from a financial strength standpoint and from our strategic allocation of cash. My other related question is around the assimilation of these employees. These are generally smaller, more entrepreneurial firms that generally have a different character of employee than the traditional Accenture trained and developed person. Can you give us any sense for the attrition at these acquired companies sort of relative to the base and how you're managing that? Thank you. Thanks for the question because it was clearly when we decided our new strategy of rotating to the new. That was clearly a big question we had in front of us. We benefited from Accenture from a very strong culture, you know very well based on what we've been doing for multiple decades. And then when you're rotating to the new, and the new is still different in terms of human capital, we're talking about the million, but again, in terms of disciplines, such as design led thinking, such as experience driven projects, such as prototyping, such as being more agile, DevOps, no doubt you need to attract people who are going to be different from where you are. And simply said, we made what I think is a very profound and important evolution in our industry, which is creating this concept of Accenture. We have a culture of cultures. So we celebrate the diversity of the cultures. So we are extremely respectful of the culture of Afford, which is our design, digital marketing organization with now 1,000 people. We have the largest digital design studio in the world. We're extremely respectful of the people we're hiring from security. As you know very well, and I will not elaborate, these people are different in the security space, and they're working like a tribe around their own discipline. And we are extremely respectful to keep that culture. That's why we created end to end Accenture Security under the leadership of Calibisel, an incredibly strong security leader oversight by Omar Abosch, our Chief Strategy Officer. So we developed this concept of culture of cultures, very different from this old and I think outdated concept of 1 culture. On the other end, we are extremely strict on our values and we're making a big difference around cultures. They have to be different. This is what's bringing richness in our company and innovation, but the values shouldn't be compromised and are not for negotiation. And the values that Accenture will never negotiate are respect for individual, inclusion and diversity, ethics, compliance, client first, stewardship. And all of this has nothing to do with culture. It's just the appropriate business and personal behavior you and I and everybody on the planet should dig up. And I think we've been very good in creating and developing this culture of cultures concept and right David, all the integration we made all, but I'm not saying that's likely been successful. Yes. We are we carefully manage the retention of the people in these companies that we acquire and our performance really over the last 3 years in terms of retaining talent has been very good. Thank you. Thank you. And our next question comes from the line of Bryan Bergin with Cowen. Please go ahead. Good morning, Bryan. Thank you. As the new becomes majority share of your business, how should we think about potential changes in corporate revenue trajectory or particularly margin expansion? Do you first see any inflection in either over the medium term? Again, I will stop short of saying anything that would imply guidance for next year beyond. But I would say that broadly speaking, if you look at 2 of our 3 overriding financial objectives, the first one being to drop durable growth, which is consistently above the market, as I've said, taking share and extending our position as a market leader. And then the second overriding objective, which is consistent modest margin expansion, while investing at an increasing scale in our business and driving EPS growth faster than revenue growth, we remain committed to those as kind of multi year objectives that we work very hard to achieve. And I think the rotation to the new creates more opportunity for achieving those as opposed to a threat. So that is I think gives us better positioning and a better opportunity to continue to deliver on those over time. Okay. And just a follow-up then, just as far as expanding addressable markets, interactive business, I thought was a great example of getting you access into an area within the CMO office. Are there other areas that you're potentially looking at within client wallets that are logical extensions that you might be targeting? Security is another one with the business resulting with Accenture Security. Clearly, we are expanding our access to new leaders. Given the depth and breadth of our services, you're absolutely right. It is our ambition to increase the coverage of the leaders we might serve with clients from the CEO, the CFO, the COO, the CIO, now the Chief Digital Officer with the launch of Accenture Digital. They are new leaders under this terminology, and we want to be the partner of choice for the newly appointed CDOs, which should be quite a natural act. You mentioned the CMOs with what gathering with Accenture Interactive. So I and we have all the business leaders in the different part of the business. So if I'm looking at Accenture, we have now certainly with the 5 businesses we have, but in these businesses, you have other activities such as analytics, interactive, mobility, cloud, security. I could mention Accenture Credit Services we have in the U. S, which is providing access in banks to credit part of the organization, and I mentioned a lot. So I guess and I would claim that we are certainly the organization in Professional Services with today the broader access to any client leadership group. Our next question comes from the line of Lisa Ellis with Bernstein. Please go ahead. Hi, good morning guys. Hi, Lisa. How are you? I'm good. So question just around the mix of the business. So I noticed GDN mix downticked slightly this quarter. That's quite unusual. I think that's the first time in years that's happened. And at the same time, you had a really strong headcount growth quarter at over 10%. But then, David, in your comments, you called out that you're seeing very strong growth in the new in areas like application services, which suggests more like build related activities, which I would associate with offshore. So kind of 2 part question coming out of that. 1, are you with the strong headcount growth and GDN mix sort of stabilizing, are we going to see an acceleration in revenue per head that might cause some break in the linearity in the business? And then also just secondarily, can you just talk a little bit about the mix of the type of work you're seeing in the New as it gets to be over 50% of the business and if that's sort of fundamentally different in terms of mix of service lines relative to the core? Yes, Maybe I'm going to start with providing our strategic direction on this. We're working extremely hard, as you know, at Accenture on robotic and automation and bringing intelligent capabilities to significantly improve our productivity, especially where we have large scale operations, so in technology and in operations. So we're working hard on what you said, how we moving forward, we're going to have less direct correlation between revenue and headcount. And clearly, the big game on this is to accelerate our investments in robotic automation and intelligence services, which is exactly where Bhaskar Ghosh from Accenture Technology and David Polishuk for Accenture Operations are working extremely hard and we're starting to see some very encouraging results where we could drive more revenues with a bit less people in some part of Accenture Operations and in some part of our BPL. We're starting to feel this point of inflection. Certainly, we need another year or 18 months to see whether this trend might accelerate and change the headcount growth, which is something, of course, we are pursuing systematically. On the second question, what is the complexion of our work in term of the new? I mean, the good news is we are rotating everything to the new, strategy, consulting, digital, of course, technology and operations. And all our services in the new are going very well. Strategy and consulting growth in the new is double digit as well is driving significant growth in Accenture Technology and in our platforms. If I'm looking at the business we're driving in analytics through SAP HANA and tomorrow with the SAP Leonardo is driving significant growth in the new SAP, in the new Microsoft, in the new Oracle, and I can mention others. But as well, it is creating activities in operations. I'm thinking about what we are doing in customer analytics linked to Accenture Analytics or to Accenture Interactive. It's driving business with our platform as a service in term of analytics, what we're calling Accenture Analytics Insight Platform. This is a service which is directly linked to the new and to the new services we're providing from an analytical standpoint. So it's really the new is driving growth in each of our 5 businesses in a very meaningful way and we love that. Yes. And Lisa, I would say that you may remember that it was Q3 of last year and then again in Q4 where I had made comments that we were starting to see an improving trend in the progression revenue per billable head. And so you asked will we start to see that. I think we have seen instances of that, if you look over the last 3 or 4 quarters. The other thing just to remind you and others who are looking at the headcount numbers, United States as an example. It's not just India and the Philippines. Terrific. Thanks. And just one quick follow-up here, I think on your comment there on the New. So would you characterize at this point, if you mix of work in the new now is much more diverse across your service lines? You're fully into what I'd call more like build and run activities? Absolutely right. And I think we see and I'm pleased with that, we see this new maturing. So as all services, you have a kind of maturity curve where you're starting with more pioneering, strategy consulting rich programs, kind of prototyping in the early phase of the maturity curve. What we see is now all these new capabilities, I'm thinking about interactive, mobility, analytic, cloud, security, soon come in the traffic artificial intelligence blockchain and immersive reality and certainly in the near future quantum computing. All of these new capabilities are getting more mature, are driving on balance bigger programs. And as we're moving from small prototyping to bigger programs, suddenly, it is expanding in several service lines from strategy to consulting, but as well to technology and to operations. So we this business is maturing very well at Accenture with a positive effect in all our 5 businesses, if you will. And indeed, we see more bigger deals, which is the sign of market maturing. Okay. Thank you, Lisa. Our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead. Hi, guys. I wanted to ask about the Accenture business dimensions. The growth rates there have surprised me. I guess on one hand, app services, which grew mid single digits in fiscal year 2016 has gone up to high single digits. And I know there's a lot of worries in the marketplace about a secular decline in that business. So that's been a surprise on the positive end. And then on the other hand, strategy and consulting, which grew double digits in fiscal year 2016, it's kind of hovering below kind of my I think when you I'll make a few comments and Pierre may have some of the I think when you I'll make a few comments and Pierre may have some as well. But first of all, when you look at app services, it's important to focus on the point that our growth is coming from the higher value application what you're starting to see is the adoption rate of new IT, what you're starting to see is the adoption rate of new IT and digital broadly is increasing. You're starting in our business to see more systems integration, application work associated with the implementation of digital technologies, new IT, etcetera. And I think that is really what's driving our application services. We've said before, Pierre has said many times that our strategy in app services is to rapidly grow and expand in the SI piece. The application outsourcing is a different marketplace. It is largely commoditized and we will continue to have an application maintenance footprint, but our application services business is really all about the systems integration, application engineering, enabling the adoption of new IT and digital technologies for our clients. And that's reflected in the pickup in growth rate. Maybe just one more comment. On the strategy and consulting combined, again, that can ebb and flow. Pierre also alluded earlier and it's worth noting again is that you really have to decompose the strategy and consulting number to really understand what's going on. And if you look at our strategy and consulting business that is relates to projects in the new, that part of strategy and consulting is growing mid teens. So let's say in the 15% kind of range. So it's very, very strong growth for those services related to enabling the new with our clients. The area that is not as robust right now, let's say, is the more traditional strategy and consulting that's not specifically tied to this rotation to the new. Okay. That's helpful. And then just as a follow-up on contributions of acquisitions. How much did the acquisitions contribute to the quarterly revenue growth? And I know we talked about 2.5 points for the back half of the year. I don't know since you took up the amount that you're going to spend on acquisitions, I think it went up to a little bit to $1,800,000,000 from $1,500,000,000 if that changed anything for the outlook? Thanks so much. Yes. That doesn't materially change the number because obviously we're acquiring these. Let's say that increase is more in the back of the last 3 months of the year. So that has more of an impact on 2018 than it does this year. Having said that, we still think we're going to be at roughly in the ballpark of 2% for the full year. Previously, I said the back half of the year would be 2 point 5%. It will be just incrementally kind of above that, but not materially above that. So really it's consistent with what I said before, slightly higher in the back half of the year than the 2.5%. Okay. Thanks so much. I'm just curious on the Q3 itself, was it up to 2.5 points so far or not quite yet? Yes, in that Okay. Thanks so much. Thank you. Next question comes from the line of Jim Schneider with Goldman Sachs. Please go ahead. Good morning. Good morning, Jim. Hello, good morning. Thanks for taking my question. I was wondering if you can maybe comment on the North America piece of the business. What you're hearing from clients just broadly speaking? Can you maybe just kind of give us a sense about whether the North America slowdown was purely isolated to the health and public service area or what you're getting from clients generally and whether you expect that to be kind of like a one off, 1 quarter thing or something that could continue for a couple of quarters? Yes. First of all, as it relates to our expectations and then Pierre may add some comments as well, but let me just deal with the results relative to our expectations. So we had seen slower growth in H and PS in quarter 1 and quarter 2. You'll remember quarter 2 was at 2%, which is where we ended up in quarter 3. We had expected not based on hope, but based on what we felt was kind of tangible evidence in the second quarter that we were going to see an uptick in growth in the Q3 and the second half of the year, and that's what I called out 90 days ago. What we saw was that, that uptick, if you will, or that freeing up of the initiation of new projects and let's say, a return to more normal decision making patterns on contracting new work, that just simply did not improve as we had expected. And so if you look at North America and the difference between where we landed and where we expected to land, the difference is the vast majority of that is in health and public service for the reasons I mentioned in the script. It's the difference between North America growth being at 3% 5% order of magnitude. And it was the difference. It was probably a point of growth. It was a point of growth at the expense level in total. So it was meaningful. Having said that, we have a very strong health and public service practice. And at some point, the log jam will break and work will be initiated and we'll be right there in the game when that happens. And of course, broadly in North America, we feel that way as well. Yes. No, absolutely right. And I understand you're asking this question on North America. For me, on the positive side, we continue to grow more than the market and gaining significant market share in North America despite the fact that our level of growth is lower, but the level of growth of the market as we are analyzing it has been as well slowing down. 2nd, our rotation to the new in North America is excellent, and we're going to get close to the 50% as with the rest of Accenture. So we have zero issues in terms of executing our strategy. And 3, we continue to invest. So we are not changing our investment profile. And we believe it's the right time to invest, to be prepared for the future and to be prepared when the market will pick up again. Now what is the situation? And indeed, a bit different from what we expected 3 months ago. And you should probably know, when you're in the US and French, so you probably have certainly a better informed point of view on this. But there is an expectation that indeed the new administration will launch critical reforms in order to boost the business and the economic growth. And this economic reform probably, I would state the one which are the most important, the health care reform, the tax reform, the trade reform and anything linked to the infrastructure investments. And all of these four were otherwise supposed to indeed unleash more growth for the business, so the business could invest and drive more growth and by driving more growth and by more investments would have a positive impact. Fact of the matter is that without Tevis, to be honest, 3 months ago, because just reading the observers and all the analysis, we believe that these four reforms would happen reasonably rapidly in the U. S. And fact of the matter, they are not yet being announced or executed. And so we are in this zone where the business is still waiting, is still positive, but waiting for these reforms to happen to invest. And so it has a negative effect, especially on HPS, which has been the vertical more impacted by this kind of wait and see mode on what's going to happen with the reform. And we have evidence that indeed, in the past couple of quarters, the overall professional services market in the been slow been slowing down. And so to some extent, we are moderating with the market, while continuing to do much better than the market. And so I feel positive that when the market will be back because that will happen, we were better positioned than anyone else given the investment and the positioning we are taking. So I'm looking that with my French glasses and I would encourage the U. S. To accelerate their reforms. And as I said, it's a perfect illustration though of the power of the diversity of our model where Europe and the growth markets combined in the Q3 grew double digits 10%. And so that is intentionally the way our business is constructed for this exact reason. And so it is working as designed. It's interesting to see, sorry to elaborate, but I think it's important for all the people listening to the call. Because you might wonder is why things are doing so well in Europe. We have 9% growth and you know it's not vibrant. But I think in Europe, you have less uncertainties. Now, I think we had having good prospect that probably Germany might reelect on Guillermo Merkle. So it's a poll of stability. I guess the election of Macron in France has been recognized and celebrated by the market because it's pro European. So it has created a very positive impact around whether Europe will disappear or not. Having Germany and France being extraordinary for business is recreating a very solid coalition. And the Brexit thing is moving at its pace, but at least we know it's going to happen. So it's not an uncertainty. The uncertainty is what exactly is it going to be hard, soft, gentle? Probably the European will figure out as they've already been figure it out over centuries. But it's interesting. If you take China, China gets not much uncertainty. The President is very clear on what it is he wants to achieve. He's driving his 5 years reform program. So you see what I mean. It's interesting that if there is one place, that's a big place in the world where you have this kind of wait for the reforms to happen, It is currently in the United States, but I'm personally feeling very good that these reforms will happen and the business will pick up again. That's helpful. Thank you for the color. And just as a quick follow-up, going back to the M and A question for a second. If you look at the run rate of M and A that you're doing in Q4 of this year, would you expect that to accelerate incrementally from here heading into fiscal '18? And then I think, Pierre, you made an allusion to using the balance sheet for M and A. Does that imply you're willing to put some debt on the balance sheet to finance more M and A at this point? I think as it relates to your last question, we've said consistently for as long as I remember that we always I mean, we're well aware of that being an option and given the right circumstances, we're we would have no concern about doing that. We would as we always do, we would make very smart decisions as to when and at what level we do that. But that is certainly an option that is open to us and we have no concerns at all about using that option given the right circumstances. Yes. I mean, so far we set, I mean, with David and I, we are extremely disciplined And our financial model is extremely clear and has been communicated to all of you. We expect 20% to 30% of our annual growth to be driven by acquisitions. So our growth is 70% to 80% organic. Let's be clear and reconfirm that. And 20% to 30% of the annual growth might come to acquisition depending on the opportunities. These things are lumpy. So that's all. We expect that anything between 20% to 35% every year of our free cash flow would be dedicated to acquisition and the rest as we do would be returned to our shareholders in a program which I think is extremely attractive to all of you with the mix of share buyback and dividend. So this is our ongoing thesis from a financial world algorithm, if you will. Now, we have opportunities by leveraging more the balance sheet to if we have any relevant opportunity that would bring differentiation, that would be more transformation, more leadership in the new. In some spaces, it could be artificial intelligence, blockchain, immersive realities, quantum computing, who say what, to make some significant steps. But so far, we are with our ongoing thesis, I just mentioned before, and we are very pleased with where we are. And I'm very pleased that we have what we need if we have for good reasons to move faster or make different transactions. Thank you. Okay. Great. Thank you. Our next question will come from the line of David Koning with Baird. Please go ahead. Yes. Hey, guys. Thank you. Hi, David. Yes. And I guess, first of all, just when we think of the new, I think you said about 50 percent of revs now and we looked back a year ago, it's about 40% of revs. So it's growing like 25%, 30%, something like that. Whereas the rest of the business is declining high single digits, it looks like. Is that just existing clients that are just shifting their preferences rather than really some of that old stuff just going away. It's just a shift. And then I guess, second to that, overall growth has decelerated a little bit. Is that because the yield on some of the new projects are a little less than some of the legacy? Well, first of all, when you look at overall growth, and when we provide a guidance of 5% to 8% at the beginning of the year, and of course, we're going to land very solidly within that range. We have said that growing double digits each and every year is it's just an unrealistic expectation. We work hard to drive as much growth as we can, but each and every year we're not going to drive double digit growth. And we think that we look at our growth rate against what the market is growing. And in a market that, let's say, generally has grown, let's say, anywhere in the 2.5% to 4% range, Let's say if you looked over the last 2 to 3 years, if we're growing 7% as we are this year, we're growing 2 times the rate of the market growth. And so are we lower than where we were double digit growth the last 2 years? We are, but we're growing 2 times the rate of overall market growth, which is clearly, clearly the indicator of a leader in the sector. And so that's what we're all about and growth in the 5% to 8% range and where we've guided to for the full year 6% to 7 percent growth is actually quite strong growth in the market. Yes, I mean, we're just reflecting on when I'm looking at the performance of the company and we are in the right place or not. I mean, summarizing what we are delivering at Accenture, we said our revenue would be in the range of 5% to 8%, right, David? I mean, so far, we are at 7% right in the zone. Then the question might be, is 7% good or not? The only way to understand whether 7 is good or not is to compare with the rest of the market. And we believe that at 7%, we're growing twice the market and growing twice the market for a company of our size is an incredible positive results. 2nd, part of our philosophy as well, at the same time, our revenues are growing 7%, our EPS is growing 10%. We're growing the EPS more than our revenues. And again, I think it's a sign of good financial performance. I remember David said we want to grow EPS at the same rate of our revenues. We are growing EPS even slightly higher than the revenue, which is, of course, an exceptional performance from David. And then for me, David is taking care of the numbers and I'm taking care of the strategy. That's why we are a good duo. For me, if there is a highlight for this quarter, and I hope that's the one you're going to take, is this 50%. There are all sorts of metrics. There are all sorts of members there, which I think are all landing in the right place. We're probably beating our guidance, we said 3 months ago on each and every dimension and providing extraordinary good financials. But then what's important, I think, for all of you and for me, are we exiting the strategy which is going to create a new adventure which could be competitive for the future? And the answer is yes. That's why I wanted to put even in the announcement we made for the first time outside in what we're calling the famous BS that we hit the milestone of 50%. And I would like all of us, analysts, investors, because you're putting a lot of confidence on Accenture, to celebrate this milestone, because it's a very big and important milestone for us at Accenture. We will properly celebrate in Boston with a very nice glass of Coca Cola for other things, by the way, because we still have both, so no champagne yet. But it is very important, Jokapart. I mean, imagine what it is. In probably 4 years, we're rotating 50% of the business of a company of $35,000,000,000 to the new. That's what has been achieved, and we're not going to stop there. We will continue accelerating because we want by 2020 to add the vast majority of our revenues being in the new. But this milestone of 50% was for me, at least, Pierre, was for me the highlight of that quarter, and I hope it is as well something you will consider extremely important in the successful execution of our strategy together with the rest of very strong financial performance. So that being said, thanks again for joining us on today's call. I mean needless to say, and with a few words, as I just said before the conclusion, that I mean NII and the leadership team of Accenture, we feel good about where we are. And we feel good about where we are because we continue to build on our strong position in the marketplace. I mean, this is what we are obsessed. We We're rotating our business to the new, which is now 50% of our revenues. And again, I would like to pound that because for me, it's exceptional. We are gaining significant market share, growing in average twice as fast as the market. And I think this is very noticeable in each and every market, if you look at this, North America, Europe and the growth market. The minimum is twice the market. In some markets, we're growing much more than twice, sometimes 4 times the market, and we continue to gain market share. And we continue and this is where I'm delighted with what we're doing. We continue to invest in new capabilities to drive future growth and to create the future of that company, while delivering value for all of you, but as well for all our stakeholders, including our 400,000 people who are working every day very hard to transform their company and make Accenture the power of choice for many of our clients. We look forward to talking with you again next quarter. In the meantime, if you have any questions, please feel free to call Angie and the team. All the best and talk to you very soon. Ladies and gentlemen, that does conclude today's conference. I want to thank you for your participation. You may now disconnect.