Earnings Call: Q2 2017

Mar 23, 2017

Welcome to Accenture's Second Quarter Fiscal twenty 17 Earnings Call. During today's conference, all participants will be in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Managing Director, Head of Investor Relations, Angie Park. Please go ahead. Thank you, Shannon, and thanks everyone for joining us today on our Q2 fiscal 2017 earnings announcement. As Shannon just mentioned, I'm Angie Park, Managing Director, Head of Investor Relations. With me today are Pierre Nonterm, our Chairman and Chief Executive 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 Q2. Peter will then provide a brief update on our market positioning before David provides our business outlook for the Q3 and full fiscal year 2017. We'll 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 for net revenues. Some of the matters we'll discuss on the 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 on this call. During our call today, we'll 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. We are very pleased with our financial results for the Q2 and first half of fiscal year twenty seventeen. For the quarter, we again delivered broad based revenue growth across many dimensions of our business, and we continue to gain significant market share. We see excellent demand for services, especially in high growth areas such as digital, cloud and security related. Our very strong bookings confirm both the relevance and success of our strategy to rotate our business to the new and support our confidence as we look ahead to the rest of the fiscal year. Here are a few highlights for the Q2 year to date. We delivered very strong new bookings of $9,200,000,000 for the quarter and $17,500,000,000 for the first half. We grew revenue 6% in local currency for the quarter and 7% year to date, with continued strong growth across many areas of our business. We delivered earnings per share of $1.33 which brings EPS for the first half of the year to $2.91 an 11% increase on an adjusted basis. Operating margin was 13.7% for the quarter and 14.7% for the 6 months, an expansion of 20 basis points year to date. We generated free cash flow of $50,000,000 for the quarter $1,000,000,000 year to date. And we continue to return a substantial amount of cash to shareholders through share repurchases and dividends, including more than $2,000,000,000 year to date. Today, we announced a semiannual cash dividend of $1.21 per share, which will bring total dividend payments for the year to $2.42 per share, a 10% increase over last year. So with the first half of the year behind us, I feel very good about our business. We see very strong demand in the marketplace for differentiated capabilities and remain confident in our ability to deliver our business outlook for the year. Now let me hand over to David, who will review the numbers in greater details. David, over to you. Thanks, Pierre, and thanks to all of you for joining us on today's call. Overall, we delivered strong results in the second quarter, which were aligned with our expectations and position us very well to achieve our full year financial guidance. We continue to see favorable market conditions in most areas of our business, especially as it relates to strong demand for digital cloud and security related services, which plays to our strength as a leader in innovating and leading in the new. Our Q2 year to date results demonstrate our ability to continue to deliver on the essential elements of our formula for driving superior shareholder value. So before I get into the details, let me summarize some of the major headlines. Net revenue growth in local currency of 6% in the 2nd quarter and 7% year to date continues to significantly outpace the market driven by double digit growth in all three components of the New, including digital cloud and security related services. Growth continues to be broad based with positive growth in the vast majority of our industries and geographic markets, more than offsetting cyclical market pressures that continue in a few concentrated areas of our business, specifically energy, chemicals and natural resources and communications and media. Absent those concentrated areas of pressure, the majority of our business grew 9% on a quarter to date basis and 10% on a year to date basis. Operating margin of 13.7% in the quarter came in as expected and consistent with last year. Operating margin of 14.7% for the first half of the year represents 20 basis points of expansion. These results continue to reflect significant levels of our investment in our business and our people to further enhance competitiveness in the marketplace. And on a year to date basis, we've delivered 11% growth in earnings per share over fiscal 2016 adjusted EPS. Our free cash flow of $50,000,000 in the quarter and over $1,000,000,000 year to date puts us on a trajectory to deliver on our annual guidance, which reflects free cash flow in excess of net income. And importantly, we continue to execute against our strategic capital allocation objectives, first by investing over $800,000,000 across 16 transactions in the first half of the year and second by returning roughly $2,200,000,000 to shareholders via dividends and share repurchases. So as Pierre said, we are pleased with our overall results so far this year and we're encouraged by the trends we see in the market and the potential for even stronger growth and momentum in the second half of the year. With that said, let's get into the details of the quarter, starting with new bookings. New bookings were $9,200,000,000 for the quarter. Consulting bookings were $4,600,000,000 with a book to bill of 1.1 and outsourcing bookings were $4,600,000,000 with a book to bill of 1.2. We were very pleased with our bookings, which landed in the range we expected and represents the 3rd highest level of new bookings over the past 10 quarters. From a business dimension perspective, we were pleased with our bookings in both strategy and consulting services combined and application services. And as you would expect, digital cloud and security related services continue to be an important theme in the work we contracted with our clients. Looking forward, we began the Q3 with a healthy pipeline and we believe we're positioned for continued strong bookings in the second half of the year. Turning now to revenues. Net revenues for the quarter were $8,320,000,000 a 5% increase in USD, 6% local currency, reflecting a foreign exchange headwind of approximately 2%, consistent with the guidance provided last quarter. Our consulting revenues for the quarter were $4,400,000,000 up 3% in USD and 5% in local currency, our outsourcing revenues were $3,900,000,000 up 7% in USD and 8% in local currency. Looking at the trends in estimated revenue growth across our 5 business dimensions, growth was led by operations, which posted double digit growth for the 5th consecutive quarter. Application Services delivered mid single digit growth and Strategy and Consulting Services combined grew low single digits. Once again, the dominant driver of our growth was continued strong double digit growth in the New with all three components growing double digits as well. Taking a closer look at our operating groups. Products, our largest operating group, led with 15% growth reflecting continued strong momentum in the business. Growth continued to be broad based with strong growth across all geographies and industries. Financial Services grew 8% in the quarter, driven by double digit growth in Banking and Capital Markets globally and overall in both Europe and the Growth Markets. As expected, Banking and Capital Markets in North America returned to positive growth this quarter. H&PS came in as expected at 2% growth, with positive growth in both health and public service globally and strong overall growth in both Europe and the Growth Markets. Overall growth in North America was flat. We expect H and PS to deliver stronger growth in the second half of the year and to deliver full year growth in the mid single digit range, consistent with the comments I made in September. Communications, Media and Technology grew 1%, reflecting solid positive growth in North America and double digit growth in the growth markets, partially offset by continued contraction in Europe. From an industry perspective, CMT was led by significant double digit growth in software and platforms with positive growth in electronics and high-tech. However, Communications and Media contracted on an overall basis, primarily driven by our business in Europe. We expect that revenue growth in our European Communications and Media business will continue to be challenged for the rest of the year. Finally, resources revenues decreased 1% in the quarter, which is in the range we expected and the storyline remains the same. We continue to see strong growth in utilities, which is more than offset by challenges in both energy and chemicals and natural resources, especially in North America. We expect our Resources Group to continue to navigate a challenging environment, but to deliver positive growth in the second half of the year. Moving down the income statement, gross margin for the quarter was 30.1% compared to 29.8% in the same period last year. Sales and marketing expense for the quarter was 10.5%, consistent with the same quarter last year. General and administrative expense was 5.9% compared to 5.7% for the same quarter last year. Operating income was $1,100,000,000 in the 2nd quarter, reflecting a 13.7% operating margin consistent with quarter 2 last year. As a reminder, in the Q2 of last year, we closed our Navitaire transaction, which lowered our quarter tax rate by 1.7 percent and increased net income by $495,000,000 and diluted earnings per share by $0.74 The following comparisons exclude this impact and reflect adjusted results. Our effective tax rate for the quarter was 20 point 7% compared with an adjusted tax rate of 15.4 percent for the same period last year. Net income was 887 dollars for the Q2 compared with adjusted net income of $905,000,000 for the same quarter last year. Our diluted earnings per share were $1.33 compared with adjusted EPS of $1.34 in the Q2 last year. Day services outstanding were 42 days compared to 44 days last quarter and 39 days in the Q2 of last year. Free cash flow for the quarter was $50,000,000 resulting from cash generated by operating activities of $155,000,000 net of property and equipment additions of $104,000,000 Our cash balance at February 28 was $3,200,000,000 compared with $4,900,000,000 at August 31. With regards to our ongoing objective to return cash to shareholders in the second quarter, we repurchased or redeemed 7,000,000 shares for $816,000,000 at an average share price of 117.27 dollars per share. At February 28, we had approximately $4,300,000,000 of share repurchase authority remaining. As Pierre just mentioned, our Board of Directors declared a dividend of $1.21 per share, representing a 10% increase over the dividend we paid in May of last year, and this dividend will be paid on May 15, 2017. So at the halfway point in 2017, we feel good about our results and our positioning to deliver on our full year business outlook. We continue to be laser focused on driving our business to achieve our core financial objectives, which include growing faster than the market, delivering modest margin expansion and strong EPS growth, investing at scale for market leadership and generating strong cash flow, which is both invested in the business and return to shareholders through disciplined and smart capital allocation. With that, let me turn it back to Pierre. Thank you, David. Our strong performance in the Q2 year to date demonstrate that we are executing your strategy very well to position Accenture as the leading and most innovative professional services company for the new digital world. With 7% revenue growth in local currency in the first half of the fiscal year, we are clearly growing faster than the market. This is driven by our accelerated rotation to the new digital, cloud and security related services, which generated revenues of about $8,000,000,000 in the first half, more than 45% of total revenues and continue to grow at a strong double digit rate. And I'm particularly pleased that we have achieved these results while continuing to invest for the future in strategic acquisitions, in building assets and solutions and the skills of our people, while at the same time, returning substantial cash to shareholders. For Accenture, acquisitions are managing to drive organic growth above the market, and we have stepped up our pace of acquisitions, investing more than $800,000,000 of capital in the first half of the fiscal year. And in the second quarter alone, we completed or announced 11 acquisitions to further strengthen our capabilities. In digital, we're acquiring Sinuschwader, one of the largest digital agencies in Germany. In cloud, we're quite solid so vision, a leading ServiceNow provider. In security, we're quite endgame's federal services business and announced the acquisition of idefense and Harris Moore. Avanade, our majority owned joint venture with Microsoft, acquired Infusion, a leading provider of digital transformation services in the Microsoft ecosystem. And we completed 3 acquisitions that further enhance our industry deep expertise, Investec in Asset Management, Seabury Group in Aviation and Davis Consulting in Utilities. Across Accenture, we are leveraging the capabilities we have acquired to bring even more innovation to clients and to drive growth and scale organically. With ModGen, which is part of Accenture Digital, we teamed with Shell and Jaguar Land Rover to create the first ever payment system in a car. This new innovation allows drivers to pay at sales stations using an in car touchscreen and app, ultimately delivering a better and more convenient customer experience. In Banking and Capital Market, our recent acquisitions of Investec and Beacon Consulting are further strengthening our asset management capabilities, adding deep skills and industry expertise, which has enabled us to win new business with top tier asset managers. And in security, with the capability of FusionX, which we acquired in 2015, we are helping a large international resort company safeguard millions of daily transactions, providing advanced services such as security audit across 15 properties, digital identity management and rigorous testing to prevent cyber attacks. We also continue to make significant investments in our unique innovation architecture, which integrates our capability across research, ventures, labs and studios to pioneer new ways of collaborating with clients to develop and deliver disruptive innovations. As part of our innovation led approach, we are opening new facilities around the world, including several in just the last few months. In Dublin, we opened the dock, our new multidisciplinary innovation, R and D and incubation hub, where all elements of our innovation architecture come to life. The DOC is a launchpad for our more than 200 researchers to launchpad for our more than 200 researchers to innovate with clients and ecosystem partners with a particular focus on artificial intelligence. In Hong Kong, we launched an Accenture Interactive Studio, where we are bringing together end to end digital customer experience services for clients. In London and Singapore, we opened new Accenture Liquine Studios designed to help clients apply rapid development techniques like Agile methodologies and DevOps to quickly turn concepts into products. And finally, in the United States, we are accelerating our innovation investment, including 10 new innovation hubs. We just opened our first one in Houston, enabling us to collaborate more closely with clients to co create and scale innovative solutions. Turning to the geographic dimension of our business. I'm going to comment on our results for both the quarter and the first half of the year. In North America, we grew revenues in local currency 4% for the quarter 5% year to date, driven by the United States, where we continue to grow ahead of the market. And given our strong market position and pipeline, we expect to see stronger growth in North America in the second half of the fiscal year. In Europe, we continue to grow significantly ahead of the market with 7% revenue growth in local currency for both the quarter and the first half, driven primarily by double digit growth in the United Kingdom, Germany and Switzerland. We are confident Europe will keep up the strong pace in the second half. And in gross market, we were very pleased with our 9% growth in local currency for the quarter and 10% year to date, led once again by very strong double digit growth in Japan as well as strong growth in China and Australia. We expect growth market to accelerate its growth in the second half. Before I turn it back to David, I want to share a few thoughts on our talent strategy to lead in the new. The large scale transformation of our business is requiring a very significant investment in our people to ensure they have the most relevant skills to serve our clients, both today and in the future. We are proactively training and upskilling thousands of people in key areas such as cloud, artificial intelligence and robotics. In new IT alone, which is all about new architectures, intelligent platforms and automation, we have already trained more than 70,000 people in just over a year. Our approach to continuously investing in the skills and capabilities of our people helps us meet the needs of our clients and enhances our ability to attract the very best talent in our industry. And that is why I'm very proud that Accenture was recently named 1 of the Fortune's Best Companies to Work For for the 9th consecutive year. So 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 Q3 of fiscal 2017, we expect revenues to be in the range of $8,650,000,000 to $8,901,000,000 This assumes the impact of FX will be a negative 2.5% compared to the Q3 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 continue to assume the impact of FX on our results in U. S. Dollars will be negative 2% compared to fiscal 2016. For the full fiscal 2017, we now expect our net revenue to be in the range of 6% to 8% growth in local currency over fiscal 2016. Before I continue with our business outlook, as a reminder, in March 2016, we announced the termination of our U. S. Pension plan. We expect to record a non cash charge of approximately $425,000,000 upon final settlement in quarter 3 2017. We will provide both GAAP and adjusted quarter 3 and year to date results. For operating margin on an adjusted basis, we continue to expect fiscal 2017 to be 14.7% to 14.9%, a 10 basis points to 30 basis points expansion over fiscal 2016 results. We continue to expect our annual effective tax rate on an adjusted basis to be in the range of 22% to 24%. For earnings per share on an adjusted basis and reflecting our updated revenue range, we now expect full year diluted EPS for fiscal 2017 to be in the range of $5.70 to $5.87 or 7% to 10% 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 approximately $600,000,000 and free cash flow to be in the range of $4,000,000,000 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 the substantial portion of cash to our shareholders. And finally, for the full year, we now expect to invest in the range of $1,500,000,000 in acquisitions. With that, let's open it up so we can take your questions. Angie? Thanks, David. I would ask that you each key to one question to allow as many participants as possible to ask a question. Shannon, would you provide instructions for those on the call? Thank you. Ladies and gentlemen, we will now begin the question and answer session. And our first question is from the line of Bryan Keane with Deutsche Bank. Please go ahead with your question. Hi, good morning, Bryan. Hi, good morning, David. Just want to ask on bookings, it came in at 9 $200,000,000 I know The Street was at $10,000,000,000 and $9,200,000,000 I think is down 3% year over year, but it sounds like that was within the range of your expectations. So just trying to gauge, was bookings a little bit lighter than you expected or was the Street just too aggressive in their assumptions? And then just secondly on the potential for stronger growth in second half twenty seventeen, maybe you can just give us an idea what that looks like between consulting and outsourcing, in particular, consulting slowed a little bit this quarter, but maybe it sounds like it's going to pick up. Thanks so much. Yes. So first of all, on the bookings, what putting aside the consensus estimate, what I had signaled last quarter that we felt confident that bookings would be stronger in the Q2 than the Q1, beginning a pattern of building through the year, which is typically what we've seen. And so we ended up with about $1,000,000,000 more in bookings in the second quarter versus the Q1. That's consistent with the comments that I made, and it's in the range that we expected. I mean, as you know, there's in any particular quarter, there are few deals that can fall on either side of the line. So we will always have kind of a range that we expect to land in and we're very solidly in the range that we expected. And for the full year, we're very optimistic about our bookings. As I've said, we began the Q3, second half of the year with a healthy pipeline and we expect to see continued strong bookings in the 3rd Q4 supporting our revenue guidance. In terms of the growth by type of work, which I think was the other part of your question, is that right? I guess he dropped off the line. So for the full year, we expect consulting type of work growth to be in the mid to high single digits and we expect outsourcing type of work growth to be in the mid to high single digits as well. If you look at it by business dimension, which I also comment on, we think strategy and consulting services combined will be in the mid single digit range. So we do see an increase in the growth rate of our strategy and consulting services combined in the second half of the year. We see application services in the mid single digit range. We see operations in the double digit range. And of course, the New will continue to grow very strong double digit growth throughout this year. Okay. Thanks so much. All right. Thank you, Brian. And the next question comes from the line of Jim Schneider with Goldman Sachs I'm sorry, Goldman Sachs. Please go ahead. Good morning. Thanks for taking my question. I was wondering if hey, David. I was wondering maybe to follow-up on the previous question. You delivered pretty good 6% growth this quarter and it was a little bit last quarter. So I guess, can you maybe talk about you talked about the acceleration in the back half of the year. So can you maybe talk about some of the factors that you're seeing that would raise lead you to not raise your revenue outlook for the full year given the commentary you just made about the back half? Yes. So let me give a few comments and Peer will perhaps want to make some comments as well from his perspective. So let me just start. When we provided full year guidance of 5% to 8%, we really entered the year with one possible scenario where the growth in the first half of the year would be relatively lower than the second half of the year. And that scenario in fact is continuing to play out. As we always say, we started the year, although we had a range of 5% to 8%, as we say, working hard each and every day to be at the upper end of the range. And that is still our focus. In terms of what's underneath that, I mean, there's a couple of ways I could kind of help you understand the way we look at the first half versus the second half of the year. But one way is through the lens of what I have called out as these 3 concentrated areas of pressure, which make up 15% to 18% of our revenue overall. And when you look at those three areas, Energy, Chemicals and Natural Resources and Communications and Media, 2 of those three areas we see and we believe we will see positive growth in the second half of the year relative to where they were in the first half of the year, and we have some confidence in that. Beyond that, when you look at the rest of our business, which is growing 10% on a year to date basis, even within that, we see certain areas of our business that did have positive growth in the first half of the year, but we expect we'll have even more positive growth in the second half of the year. And an industry that comes to mind is health, for example, which has been lower in North America, but we expect will be stronger in the second half of the year, more in kind of the typical growth rates that we expect for health. So overall, the year is really playing out as we expected. We continue to work hard to try to land in the upper end of our range as we always do. Supporting our confidence level in the second half of the year, we narrowed the range to 6% to 8%. Yes. No, it's hard to build on this. I mean, you said it very well. I mean, to put it very simply, we feel very good for the second half of the year. That's it based on facts. We have very good bookings. We have good pipeline. We have great momentum in most parts of our business. Just to give you a clue, we're covering 13 industries, group big, if you will, 13 industries. On these 13 industries, 10 are positive. And on the 10, 6 are high single when I say high single, this one is at 9.5, let's run to 10 for simplicity, 6 would be double digit. So you could only be positive when you see such a momentum. Indeed, we have 3 very specific situations. And frankly, these 3 situations, at least 2, are linked to some client situation where indeed the business been slowing down for absolutely good and valid reasons. And we have evidence that these 2 industries in resources, C and R and Energy, will be back in the second half of the year. So I'm extremely positive for the second part of the year. Okay. Jim, thanks. The next question is from the line of Tien Tsin Huang with JPMorgan. Please Somebody told me you're in Hawaii this morning, so I guess it's early for you. It's, 2:30, not too bad. I'm sitting outside. You've been pretty confident. Pierre said he appreciates the commitment. You may not have heard that. Well, not too bad. Sitting outside the wind feels good. Well, Virginia lost, so that's a good way to take my mind off of things folks on Accenture. I'll ask about, I guess, you just talked about the 3 areas of pressure. Some of them are linked to client situations. I'm curious have you been able to replenish your pipeline or are you seeing just comps improve? Are you actually selling into those existing clients? Just trying to understand how you're able to sort of remix out of the troubled areas and see improvement there, if that makes sense? Yes. I would say it's a combination of the 2. I mean, just to be blunt, it is a combination of the 2. There is a benefit from the comps getting easier and that's just the math. But more importantly, there are really underlying fundamental improvements that we see in the business activity, the dialogue that we're having with our clients, the investment in digitization in addition to the kind of the cost rationalization focus that those industries have had for so many quarters now. And so the comps are part of it, but there is some fundamental improvement in the business, a lot of green shoots that we see that I think have us much more optimistic about the trajectory. And I would add, if you look at resources, which has been one of the area of watch carefully, again, cut to the top because you're not mentioning utilities. Our utilities business is continue growing double digit. So this one is on reasonably good fire, and we're doing very well because this is an industry rotating rapidly to the new. And you have a direct correlation in the business with the rotation to the new from our clients and the performance of these industries. This is as simple as this. Energy is back. And I think when I look at the 3, energy and then you have C and R, chemical and natural resources. C and R being the smallest of the 3, to be clear. And so NLG is very important moving forward, and we are getting more and more evidence that NLG will perform much better in the 2nd part of the year. Yes. I see. Okay. Just a quick follow-up and just the M and A contribution in the quarter and for the year, it sounds like you're up to the spend target to $1,500,000,000 Yes. It's so for the full year, we continue to expect to be in the range of 2%. But if you peel it back, H1 is, let's say, closer to 1.5% and H2 would be closer to 2.5%. And so in the second half of the year, we will see an additional contribution in inorganic relative to H1. But for the full year, it will still be in the 2% range. The additional spend up to $1,500,000,000 Tien Tsin, a lot of that will happen in the Q4 and the revenue impact of those transactions is much more relevant to FY 2018 than it would be FY 2017. Got it. Got it. Thank you so much. Okay. Thank you. And the next question is from the line of David Grossman with Stifel Financial. Please go ahead with your So I know there's been already several questions about growth, but if you look back, consulting growth over the last 4 years has been pretty lumpy, right, 'thirteen, 'fourteen relatively weak, 'fifteen and 'sixteen relatively strong and this year is falling somewhere in between. And I know we've had some fairly significant technology cycles as well as peers that outlined pretty significant industry cycles impacting growth for the entire industry. But can you help us think through what the growth in the consulting business should really look like on a normalized basis if there really is such a thing recognizing that you've got a portfolio and there's always going to be pluses and minuses each year? Yes. I would say on a normalized basis, kind of range to, let's say, high single digit, kind of range to let's say high single digit depending on the cycle that we're in. So it's going to be a mid to high single digit contributor across our portfolio of businesses. I mean, the consulting growth to be clear as well is connected to this dynamic that we've talked about with our overall growth. Meaning that if you look at these 3 industries that are contracting, and primarily because of these cyclical pressures, that has had an impact in recent quarters in particular on our consulting and strategy growth rate. And we think that that drag, if you will, that we've seen the last, let's say, the last few quarters will start to mitigate some in the second half of the year. We're also making investments in our consulting business, which start to help drive our growth rate in the second half of the year and beyond as well. Yes. No, absolutely. I mean, the line, the direction should be mid to high single digit. We believe this is where the consulting business should be. Sometimes, you're going to be higher than this because you have a combination of good factors and sometimes you're just a bit behind. And here, we have this combination of these three situations creating a disproportionate drag on our consulting. So as we mentioned before, definitely 2 of the 3 will get back, and so the consulting associated will get back as well. On the other side of the spectrum, we are not only investing in what we're calling the new digital, cloud and security, but we, as you know, putting some investments in building extremely deep skills in areas where we believe there could be higher growth in a very specific way. You've seen the acquisition of Kirk Salmon, a premium brand in retail North America. We are doing the same in aviation in very deep skills. In investment management, where we believe it's going to be a great market and we are making acquisition there on a very targeted basis. So I'm extremely confident that the consulting will be back. Right. And if I could just ask a quick follow-up to your comment about re skilling. Obviously, the pace and breadth of the current cycle has driven the need to re skill at a faster than normal pace. So that aside, is it fair to expect after this year that the pace of acquisitions would continue to contribute this 2% rate of growth or would you expect that to come back a little bit as the cycle matures? Yes. I mean, we're putting a very significant attention on the skills of our people. I mean, we just broke the 400,000 mark in term of people, and we want to have 400,000 talented people. And by talented people, I mean having the right skills, which is what we mean by talented people, the right skills for today and more important, the right skill for tomorrow. So what we did and not starting now, but starting years ago is to make sure that in training and education, we are investing significantly. I think the number is public. We are roughly investing $900,000,000 in training and education to make sure that we have the best skilled people and we're able as well to attract the best talent. So we're combining our organic risk Kelly, if you will, dollars 900,000,000 We have digitalized all our training to make sure that our cost of training is extremely efficient. And I was just impressed, frankly, to recognize my friend, Bhaskar Ghosh, on what he has been doing with our Accenture Technology business in rescaling last year in what we call in new IT, 70,000 people. He's managing roughly 200,000 people, Pascal, roughly, if I may say. And the goal for us is to reskill 100% of these people over 3 years, 70,000 plus 70,000 plus 70,000. In addition, we are recruiting indeed through acquisition very deep skills, very deep skills. We believe it's going to take too long to grow organic. And so we have a good, I think, a 2 pronged strategy, if you will, investing in our people to make them relevant. And I think this is something we owe to our clients to our people. We have a responsibility. I feel that way. I have the responsibility to make them relevant for the future and then complement with high notch iconic talent we're getting from the market. So we have a kind of perfect blend. Very good. Thank you. All right. Thank you, David. The next question is from the line of Edward Caso with Wells Fargo. Please proceed with your question. Good morning, Ed. Good morning. I'm only on the East Coast, so not too bad off here. Well, we appreciate your commitment as well, Ben. Well, thank you. My question is really around robotics and artificial intelligence from two dimensions. How much are you applying that to your own business to maybe delink a little bit revenue from people growth? And how much are you helping your clients and at what pace is it coming on? Thanks. Yes. Thanks for the question. And answer to your question number 1 is extensively and answer to question number 2 is extensively. I mean, what we are, especially in Accenture Technology and in Accenture Operations and, of course, in Accenture Digital, we have now infused in Accenture Technology all new capabilities call for us intelligent platforms. The name we're using, the public name is MyWizard. MyWizard is the 1st in that category of intelligent platform, so you can develop code using more and more intelligent virtual agents. So we're doing that massively, but it's not enough. We're indeed applying to Accenture Technology in our technology dairy centers and more important to Accenture operations in our BPO centers, RPAs, I mean, robotic process automations that we are executing for Accenture. And it's interesting to see that many clients are visiting us and considering Accenture of now the benchmark and they're learning from what we do to apply to clients. So extensively in Accenture, because the name of the game is not labor, it's productivity. And that's always been the name of the game in Accenture. So we want to operate at maximum productivity and efficiency with talented people. That's what we have in mind. And as you said, starting to see in some parts of our BPO business the de correlation between revenue and labor, and we believe strongly that the combination of artificial intelligence, machine learning, robotic process automation in the coming 5 years will make a significant difference in this correlation between labor to revenue. From a client standpoint, huge demand. I've just been pitching RPA and closing RPA deals last week just to give you a view. So it's extremely vibrant. Why? Because you know the client's agenda is still the same as we said, I remember in one of our high digitalization and rationalization. Digitalization to create new business model and all the architecture we have been putting in place in the New is resonating with that with Accenture Interactive, Mobility, Analytics, Cloud and Security and Rationalization. RPA is at the heart of rationalization for robotics and automation, and the demand is just growing and we are very well positioned. My other question is on the benefit side of your pension charge. What kind of in basis points contribution to operating margin will that drive in fiscal 2018? Thanks. It's not material. And I mean in the scheme of Accenture, the benefits that we're deriving from doing this are not that material in terms of the bottom line. Thank you. Thank you. The next question is from the line of David Ridley Lane with Bank of America. Please proceed with your question. Sure. Thank you. Hi, David. Thank you. Good morning. I did want to maybe touching on that last question. I know you do not manage to gross margin, but the year to date gross margin expansion is notable given the longer term trends. Are you seeing the benefit of automation show up there? Or is this driven more from the revenue mix shift towards digital? Just trying to get a sense of, is this theme of automation, robotic process, automation helping on the gross margin today? Yes, it is so most of by the way, gross margin let me say that even though gross margin has looked good the last two quarters, our message just does stay the same. For many reasons we explained, we really focus more on operating margin. Having said that to your question, the big driver I think when you look at the 1st two quarters has been improvement in our contract profitability. So our cost to serve clients is one of the biggest major components in in our gross margin and we have seen improvements in contract profitability, which reflects broadly some of the improvements we've seen in pricing that reflects there's some mix shift as we let's say, we have a higher percentage of higher value kind of added services, even higher percentage of those that type of work, which includes digital, but not limited to digital in the mix, etcetera. And as well, just the overall efficiency of our payroll structure, which is of course the biggest driver of our cost overall. And so it's more about contract profitability and managing our payroll efficiency with a high at a high level of efficiency. Is automation in the mix of our improved contract profitability? It is, but in no way would that be a dominant driver. It's in the mix, but with many other things as Do you see any drag from regulatory uncertainty among your U. S. Health insurance clients? Or maybe said differently, since you expect an acceleration there, what would be the main drivers to get you there? Yes. We did see an impact in the pace of decision making. When you look back now with the in the rearview mirror, we did see an impact in the pace of decision making in health in North America during the first half of the year. We believe and we've got fact points and tangible evidence that we would point to that that slower pace of decision making is behind us. And that as we've now turned into the new calendar year, we are every month that goes by, we're a month into the new administration. Then the decision making is resumed at normal levels and that's part of the reason why we are more why we are positive on improved growth rates in the second half of the year. So we did see an impact in the first half of the year, we believe that that's largely behind us. And the next question is from the line of Brian Essex with Morgan Stanley. Please go ahead with your question. Hi, good morning and thank you for taking the question. I was wondering if you could maybe dig in a little bit to Banking Financial Services. You called out North American Capital Markets mix improving. Maybe could you can you provide a little bit of color behind the improvement in that business and what the primary drivers of that improvement might be? Yes. We I mean, overall, Financial Services is doing very well. I mean, we have been posting, I think, 8% growth in the Yes. Banking in Capital Markets is 10% It's double digit. It is double digit. So I mean, we're doing very well. In North America, more especially, we're starting to see again more demand in the New. I mean, second, we are working in having a more diversified portfolio of clients and not only the kind of big category leaders, if you will, due to a more significant regionalization of our business in the United States, where we expect great benefits starting in H2. And in addition, as I mentioned, especially in Investment Management, which is part of Capital Markets, we've made a few acquisitions. You've seen Beacon, and they are providing as well deep skill. So again, as in everything, it's a combination of 2 or 3 factors you're putting together to create growth. And we see some more optimism as well from clients linked to the expected deregulation of some part of their business. So all of this put together, is creating an environment which is getting better. Great. That's very helpful. And maybe as a follow-up, could I ask about Accenture Interactive? And I've seen some kind of interesting moves in the press recently there. How big is that business? And is that primarily CMT focused? Or how do you plan to kind of weave that in with your digital aspiration? Yes. I'm extremely pleased with Accenture Interactive, and you're giving me the opportunity to recognize the leader of Accenture Interactive, Ryan Whipple, who is just doing a great job in leading that part of the business. In less than over 7 years or something like this, we created the largest digit pure player in digital marketing. So the digital agency of Accenture is now one of the largest and a category leader. We are leading in digital design, especially after the acquisition of a companion Fjord and many other acquisitions, the last one between Carma Rama in the UK, which is a premium independent, the best independent company in the UK. Digital production, you remember the acquisition of Aventa some years ago. Digital commerce, which of course is very important on back of the acquisition of Equity, we made in the U. S. Some years ago and all what we are doing in terms of customer analytics. So we were very pleased that last year, Advertising Age ranked Accenture Interactive number 1, And for us, it's a very critical milestone. We see more and more clients indeed turning from the so called holding companies to Accenture Interactive. And now I'm very pleased to report that we are very close to $6,000,000,000 in Accenture Active, making us a category leader. So couldn't be more pleased with Accenture Interactive because you know, sorry to elaborate a bit, I know we're running always out of time, but again, I'm passionate about this. So I'm sharing my passion with you. The business in the future will be more and more driven by experience and design of new capabilities, of new products, of new ways of engaging with customer, consumer, patient, employees. So for us, it was absolutely critical to put on the top of our services the experience, the design led, experience led kind of capability. And just to give you a data point, I think we acquired Fjord. They had 150 people roughly, 150, 180, something like this, less than 200. Now we're going to crack the 800 people insured, making certainly fueled one of the largest pure player in digital creative design. So that's what we do, and we're pleased. Great. So quite a bit larger than we last heard, so it's great to hear. Very helpful. Thank you. This is what we like to be. I mean, we in our rotation to the new I'm sorry to be too long, but in our rotation to the new, in interactive, mobility, analytic, cloud and security, we want not only to be the number 1 if you addition this whole thing, which is where we always have €8,000,000,000 in H1 only, but we want to be number 1 in each of the 5. That's what we mean by scaling to lead, and this is what we're doing relentlessly. Okay. Shannon, we have time for one more question and then Pierre will wrap up the call. Thank you. And our final question comes from the line of John I'm sorry, Brian Bergin. Our final question comes from the line of Joe Fitzgerald. Please go ahead with your question. Hello. So I guess, what inning do you think digital might be in? And what's the next phase of the digital movement? It's I mean, I would say that the digital wave is still in your baseball analogy, I would say it's still in the early innings. I mean, it's there is a if you talked about it in terms of the maturity curve, it is low on the maturity curve. There's ways to go. Yes, early days. If you look at this and of course some capabilities are more mature than the others. And when we're putting that in our Accenture framework, we said we have 3 waves. I mean, the digital consumer and this way is quite maturing a lot because, I mean, you see, this is probably where we're doing the material of Accenture Interactive business of around €6,000,000,000 Then you have the digital enterprise, how you digitalize all the parts on the enterprise. And here, the robotics and the automation will bring a lot. So I think this is coming. And then you have what we're calling digital operations and IoT. And this is nascent, to be honest, and that might be certainly the biggest wave of the 3. And so we are positioning Accenture already in what we call industry X.0. We are probably 4.0 as we speak, but they're going to be 5, 6.0. And we're positioning a lot of Accenture on mobility, connected platform, Internet of Things. We have already developed many partnership in the ecosystem with OEM providers to extend our reach to this industrial Internet. We have labs. I'm thinking about what we have in Bangalore, what we have in Beijing, when we are developing very deep industry solutions in the context of the IoT. So it's early days. I mean, it's going to be away for probably a couple of decades. Okay. And then just as a quick follow-up, how is competition in outsourcing, particularly pricing? Thanks. I would say that really no notable change in the competitive landscape in outsourcing if you're maybe asking specifically about the application maintenance piece of our application services that continues to be a very, very competitive pricing environment. So that's more of the same. And I would say if you look at BPO as another big piece of outsourcing, I would say no notable change. So no notable change, but some at Accenture, again, because if there is something we hate in our company, it's commoditization of services. So we're fighting against commoditization always to move and to rotate to higher value services. The business you're mentioning is subject to commoditization at great pace. Our answer to fight against commercialization has been to infuse, as I mentioned before, through Bhaskar Ghosh and Debbie Polishuk, leading Accenture Technology and Accenture Operations, for a lot of robotics, a lot of automation, less labor arbitrage, more technology, more intelligence. And so indeed, we want to make these activities more tech automated led, less labor intensive like many of our competitors been doing, and we are following a very different trajectory. Thanks. Okay. It's time to wrap up. Thanks a lot to have been so patient. With us. Thanks again for joining us on the call today. As you can tell and I've heard from David and I, we are very confident in our ability to deliver another strong year in fiscal year 2017 to continue gaining significant market share as we do to even further accelerate our rotation to new and innovative services. And at the same time, as we are investing significantly for the future, continuing delivering value for our clients, our people and our shareholder. At the same time, we transform Accenture to be even more successful. We look forward to talking with you again next quarter. In the meantime, if you have any questions, feel free to call Angie and her team. All the best, and talk to you very soon.