Earnings Call: Q2 2016

Mar 24, 2016

Welcome to Accenture's Second Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Managing Director, Head of Investor Relations, Ms. Casey McClure. Please go ahead. Thank you, Greg, and thanks to everyone for joining us today on our Q2 fiscal 2016 earnings announcement. As Greg just mentioned, I'm Casey McClure, Managing Director, Head of Investor Relations. With me today are Pierre Ninterm, 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, along with some key operational metrics for the Q2. Pierre will then provide a brief update on our market position before David provides our business outlook for the Q3 and full fiscal year 2016. 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 materials we discuss in 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 of 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 our call today, 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 call. And now let me turn the call over to Pierre. Thank you, Katie, and thanks everyone for joining us today. We delivered very strong financial results for the Q2, and I'm extremely pleased with the momentum we have created in our business over the last 8 quarters. This quarter, our growth was again broad based across the different dimensions of our business. Our strategy is clearly resonating with the needs of our clients and differentiating Accenture in the marketplace, enabling us to gain significant market share. Here are a few highlights from the quarter. We delivered outstanding new bookings of $9,500,000,000 We grew revenues 12% in local currency, a very strong performance, including double digit growth in 4 of our 5 operating groups and all three geographic regions. Operating margin was 13.7%, an expansion of 10 basis points. We delivered outstanding earnings per share of $1.34 on an adjusted basis, a 24% increase. We generated free cash flow of $169,000,000 and we continue to return a substantial amount of cash to shareholders through share repurchases and dividends. Today, we announced a semiannual cash dividend of $1.10 per share, which will bring total dividend payments for the year to $2.20 per share, 8% increase over last year. So with the first half of the year behind us, I feel very good about our business and how we are positioned for the year. Based on our strong performance, we are raising our business outlook for both revenues and earnings per share for the year. Now let me hand over to David. David, over to you. Thank you, Pierre, and thanks to all of you for joining us on today's call. Let me start by saying that we were very pleased with our outstanding financial results in the Q2. Once again, our results this quarter reflect continued strong momentum across almost every dimension of our business, reflecting the strength of our leadership position in the market and the relevance of our offerings and capabilities to our clients. Before I get into the details, let me summarize some of the important highlights from this quarter. Strong local currency growth of 12% represents the 6th consecutive quarter of double digit growth, which is even more impressive when you consider that quarter 2 of last year grew 12% as well. The overriding theme of broad based growth was evident again this quarter with 4 of our operating groups in all three geographic areas posting strong double digit growth. Our growing leadership position in digital related services continue to serve us well and combined with cloud related services and security, we continue to be the partner of choice in helping our clients rotate to the new. Operating margin of 13.7 percent reflects 10 basis points expansion within our annual guided range. Our profitability continues to reflect the absorption of significant investments in our people and in our business as we further strengthen our leadership position in the market. The combination of strong revenue growth, expansion in our margin and tax rate efficiencies resulted in 24% EPS growth for the quarter and 11% EPS growth year to date, excluding the gain on sale of Navitaire, which I'll describe in more detail shortly. Free cash flow of $169,000,000 came in as expected and keeps us on a trajectory to deliver our annual guidance range, which reflects free cash flow in excess of net income for the full year. And importantly, we continue to invest at scale in our business, closing 5 acquisitions in the quarter with year to date invested capital of approximately $750,000,000 So we're very pleased with our results, which continue to demonstrate our ability to successfully deliver on our 3 imperatives for driving shareholder value: durable revenue growth, sustainable margin expansion, and strong cash flow with disciplined capital allocation. With that said, let's now turn to some of the details for the quarter. As expected, we delivered a higher level of new bookings this quarter at 9.5 $1,000,000,000 including an all time record high consulting bookings. Consulting bookings were $5,000,000,000 with a book to bill of 1.2 outsourcing bookings were 4,500,000,000 also with a book to bill of 1.2 and consistent with our target. We're particularly pleased with the strong and balanced demand across all of our business dimensions, which is best illustrated by our estimated book to bills. Consulting and strategy had a combined book to bill of 1.1, application services a book to bill of 1.2 and operations a book to bill of 1.3. And across the board, digital related services continue to be a significant driver of our new bookings. Finally, we are pleased that we had 10 clients with bookings in excess of $100,000,000 which again points to the strength of our client relationships and their trust in our ability to drive their most important initiatives. So turning now to revenue, net revenues for the quarter were $7,950,000,000 a 6% increase in USD and 12% in local currency, reflecting a negative 6% foreign exchange impact. Our quarter 2 revenues were higher than our guided range primarily due to consulting demand being even stronger than expected across many of our operating groups and geographic markets. Consulting revenues for the quarter were $4,300,000,000 up 12% in USD and 18% in local currency. Our outsourcing revenues were $3,700,000,000 flat in USD and an increase of 6% in local currency. Looking broadly at drivers of revenue growth for the quarter, we had strong and balanced estimated growth across all business dimensions. Digital related services continue to be the dominant theme with growth above 25%, which once again fueled double digit growth in our strategy and consulting services combined. Operations returned to double digit growth and we saw an uptick in application services to high single digit growth. Taking a closer look at our operating groups, H and PS grew 15% in the quarter with very strong double digit growth in both health and public service and overall in North America and the growth markets. Products delivered broad based growth of 14% and continued to be led by our industrial and life sciences industries, which were very strong overall growth in Europe and the growth markets. Communications, Media and Technology grew 13% in the quarter, led by double digit growth in North America and the Growth Markets, as well as Electronics and High-tech and Media and Entertainment globally. Financial Services momentum continued with 13% growth led by very strong double digit growth in Banking and Capital Markets as well as strong growth across all three geographies. And finally, resources delivered 4% growth, led continued strong double digit growth in utilities, as well as strong overall growth in North America and Europe. We continue to navigate cyclical headwinds in energy and in chemicals and natural resources where growth is significantly challenged. At the same time, looking at resources overall, we feel that we are more than holding our own in a very difficult environment. Moving down the income the income statement, gross margin for the quarter was 29.8% compared to 29.9% in the same period last year. Our sales and marketing General and administrative expense was 5.7%, up 10 basis points from the Q2 last year. Operating income was $1,100,000,000 in the 2nd quarter, reflecting a 13.7% operating margin, up 10 basis points compared with quarter 2 last year. In the Q2, as part of launching an important partnership with Amadeus, we closed our Navitaire transaction, which lowered our quarter 2 tax rate by 1.7%, increased net income by $495,000,000 and increased diluted earnings per share by $0.74 The following comparisons exclude this impact and reflect adjusted results. Our adjusted effective tax rate for the quarter was 15.4% compared with an effective tax rate of 26 for the Q2 last year. The effective tax rate for the Q2 of fiscal 2016 benefited from a final determination of prior year tax liabilities as well as changes in the geographic distribution of earnings. Net income on an adjusted basis was $905,000,000 for the 2nd quarter compared with net income of 743,000,000 for the same quarter last year. Adjusted diluted earnings per share were 1.34 dollars compared with EPS of $1.08 in the Q2 last year. This reflects a 24% year over year increase, of which $0.17 or 16% came from the lower tax rate. Turning to DSOs, our day services outstanding were 39 days compared to 41 days last quarter and 35 days in the Q2 of last year. Free cash flow for the quarter was $169,000,000 resulting from cash generated by operating activities of $317,000,000 net of property and equipment additions of $148,000,000 Moving to our level of cash, our cash balance at February 29 was $3,000,000,000 compared with $4,400,000,000 at August 31. Turning to some other key operational metrics. We ended the quarter with a global headcount of about 373,000 people, which was roughly flat with quarter 1 and up 15% compared to quarter 2 of last year. We now have approximately 273,000 people in our global delivery network. Our utilization in quarter 2 was 90% consistent with last quarter. Attrition, which excludes involuntary terminations, was 13%, consistent with quarter 1 and down 1% compared to the same period last year. With regards to our ongoing objectives to return cash to shareholders, in the second quarter, we repurchased or redeemed 8 point 1,000,000 shares for $829,000,000 at an average price of $102.14 per share. At February 29, we had approximately $6,400,000,000 of share repurchase authority remaining. As Pierre just mentioned, our Board of Directors declared a dividend of $1.10 per share, representing an 8% increase over the dividend we paid in May last year. This dividend will be paid on May 13, 2016. Finally, before I close, let me mention that our board has approved a decision to terminate our U. S. Pension plan, which will reduce future risk and administrative costs to Accenture. This is subject to regulatory approvals and is not expected to be finalized for 12 to 18 months. Upon final settlement, we expect to record a principally non cash settlement charge of approximately $350,000,000 So, at the halfway point in the fiscal year, we've delivered very strong results and feel that we're well positioned for the remainder of the year. Our results continue to demonstrate the durability of our growth, profitability and cash flows and our ability to manage our business to deliver value for all of our stakeholders. Now let me turn it back to Pierre. Thank you, David. So looking at the first half of the fiscal year twenty sixteen, our outstanding results demonstrate that we continue to execute very well against our growth strategy and that we are taking a leadership position in every part of our business. Year to date, we have delivered 11% revenue growth in local currency, which is well above the market growth rate. We continue to accelerate our rotation to the new digital, cloud and security related services, which together accounted for nearly 40% of our total revenues in the first half of the year and grew at a strong double digit rate. At the same time, we continue to see very strong performance across the rest of our business, which remains extremely competitive and is generating very good growth. Let me bring all of this to life with a few examples, beginning with how we are leveraging our innovative capabilities to help clients drive digital transformation. Working with Boston Scientific, we have jointly developed a cloud based digital health solution for hospitals Built on the Accenture Insights platform, the new solution is designed to leverage our analytics capabilities to significantly improve patient care and reduce treatment costs. Accenture Interactive continues to gain traction in the marketplace and has recently been named the digital agency partner for celebrity cruises, where we are helping redesign the digital customer experience and for L'Oreal in Brazil, where we are responsible for search engine optimization and digital marketing analytics. In Accenture Mobility, we are using the Accenture Connected platform to drive digital transformation for Metro de Madrid, one of the largest transportation systems in the world. We expect to increase operating efficiency, improve the passenger experience and enable new Internet of Things based services. We continue to operate at the heart of our clients' businesses with strong demand for our core capabilities. And given our industry expertise and end to end capabilities, we remain the partner of choice for the world's leading companies. In the U. S, Accenture's strategy is helping FirstEnergy improve competitiveness and operational agility with a cash flow improvement program that is expected to deliver more than $450,000,000 in savings over 3 years. We are working with a leading food company to transform its global operating model, An integrated team from Accenture Strategy, Accenture Consulting and Accenture Operations is providing process redesign as well as finance and accounting and HR Business Process Services. We continue to invest across our business to further enhance our capabilities and differentiation in the marketplace, including making 9 acquisitions in the first half of the year. In particular, we have made significant investment to strengthen our industry expertise in several key sectors. In health, we acquired Syagisys Consultants, a leading provider in implementing electronic health record systems in the U. S. In Financial Services, we acquired Beacon Consulting based in Boston to expand our capabilities in asset management and we acquired Formicari, a leading provider of systems integration and technology consulting for trading platforms in the UK, and Canada. Also in Financial Services, we created a specialized practice for blockchain technology, which is expected to drive significant efficiency gains for financial institutions. To accelerate our speed to market, we invested in Digital Asset Holdings, a leading developer of blockchain technologies. And in resources, we acquired Schlumberger Business Consulting, the international management consulting arm of Schlumberger. And in North America, we acquired Simeon to expand our consulting digital and cybersecurity services for industrial asset management. Turning to the geographic dimension of our business. I'm very pleased with the strong and balanced growth we are driving across all three of our geographic regions. And I am delighted that we delivered double digit growth for the quarter in many of our largest markets, including 6 which together comprise 70% of our total revenues. In North America, we delivered 12% revenue growth, driven by another excellent quarter of strong double digit growth in the United States. In Europe, we delivered exceptional results with 14% growth in local currency. We delivered double digit growth in the UK, Italy, Spain, Switzerland and Germany, as well as high single digit growth in France. And in growth markets, we delivered 10% revenue growth in local currency, led once again by strong double digit growth in Japan, but we also generated double digit growth in China and in India as well as solid growth in Brazil despite a very challenging environment. Before I turn it back to David, I want to share a few thoughts on what it means to run Accenture as a high performance business. It is imperative that we attract, develop and inspire the very best talent in our industry. And I am proud that for 8 years in a row, Accenture has been named 1 of the Fortune Best Company to Work For in the U. S. I am equally proud that in India, Accenture was ranked the top company in our sector on business today's list of the best companies to work for. In our business, trust is everything. And I couldn't be more pleased that for the 9th year in a row, Accenture was recognized on EtisFair list of the world's most ethical companies. This is strong recognition of our commitment to ethical leadership and corporate social responsibilities. So as you can see, every day we're making Accenture an even better business partner for all of our stakeholders. We have very strong momentum in our business and we continue to deliver value in the marketplace. And with that, I will turn the call over to David to provide our updated business outlook. David, over to you. Thank you, Pierre. Let me now turn to our business outlook. For the Q3 of fiscal '16, we expect revenues to be in the range of $8,100,000,000 to $8,350,000,000 This assumes the impact of FX will be negative 2.5% compared to the Q3 of fiscal 'fifteen and reflects an estimated 7% to 10% growth in local currency. For the full fiscal year 'sixteen, 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. Dollar will be negative 5% compared to fiscal 'fifteen. For the full fiscal 'sixteen, we now expect our revenues to be in the range of 8% to 10% growth in local currency over fiscal 'fifteen. For operating margin, we now expect fiscal year 'sixteen to be 14.6% to 14.7%, a 10 to 20 basis point expansion over adjusted fiscal 'fifteen results. As I mentioned earlier, we closed our Navitaire transaction in the 2nd quarter, which will lower the full year FY 'sixteen tax rate by approximately 1.5% and increased diluted earnings per share by $0.74 Our guidance for fiscal 2016 excludes the impact of this transaction. We now expect our adjusted annual effective tax rate to be in the range of 24% to 25%. For adjusted earnings per share, we now expect full year diluted EPS for fiscal 'sixteen to be in the range of $5.21 to $5.32 or 8% to 10% growth over adjusted fiscal 'fifteen results. Now turning to cash flow. For the full fiscal 'sixteen, we continue to expect operating cash flow to be in the range of $4,100,000,000 to 4,400,000,000 dollars property and equipment additions to be approximately 500,000,000 and free cash flow to be in the range of 3,600,000,000 to 3,900,000,000 Finally, we continue to expect to return at least 4,000,000,000 through dividends and share repurchases and also to continue to expect to reduce the weighted average diluted shares outstanding in the range of 1.5% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up to questions. KC? Thanks, David. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask the question. Greg, would you provide instructions for those on the call, please? Thank Your first question comes from the line of Kenjin Huang from JPMorgan. Please go ahead. Hi, good morning. Good morning, Dave. Good morning. Obviously, good quarter here. Just wanted to dig in on the upside given the strong book to bill, it looks like revenue $200,000,000 above guidance and it's usually a pretty tricky quarter. It doesn't sound like it's large deal oriented either. So I'm curious, do you have resources to meet this demand, especially given the strength in consulting? I'm asking because I want to gauge your confidence in executing against this momentum within your margin targets. So I'll start with that question. Thanks. And so if I just kind of started and worked through the points that you made is that we did have an even stronger quarter than we had expected, no doubt. As you alluded to, in the mix is the fact that the Q2 can be a more difficult quarter to predict, which you know that well as you know our business well. And the reasons are that you have the holiday period in there, including the New Year period, which sometimes can be a little unpredictable in terms of how that impacts our available work days, if you will. And then of course you have the turn to the new fiscal year, which can also create sometimes some temporary changes in buying patterns during that 1st month or 2 of the new calendar year. In our case, neither of those things had an impact on us. And to the contrary, the momentum that we've had now for many quarters continued and even built further. And we saw that the upside relative to what we had expected was in our consulting and strategy services combined or our consulting type of work where we had expected double digit growth, but it came in even stronger than we had expected. And Tien Tsin, we are very pleased that we were able to support that growth with essentially flat headcount versus quarter 1, which we view as a very positive thing. And so as it relates to capacity, we certainly have a supply plan that supports the revenue growth that we've projected for the 3rd quarter and the full year. We feel very good about our supply management and our ability to access talent in the marketplace is as good as it's ever been. Okay, great. And just my quick follow-up, just like I asked last quarter, inorganic contribution to revenue and maybe margin, and if you can, David, give it to us across consulting and outsourcing? Thank you. Right. So the inorganic contribution continues to be in the range of about 2%. And as I mentioned last quarter, if you look at it by type of work, it is bigger in consulting than it is in outsourcing. In consulting, last quarter I said that it was about 4%. And so we continued in the 2nd quarter where it was more consultant oriented than outsourcing oriented. Your margin question, Tien Tsin, was what now? No, just same question related to impact to margins, operating margins from the acquisitions given the cost side of it. Well, I would tell you that maybe if I just answered it even in a broader way, I mean, the acquisitions are an important part of our investments, but they are not the only part of our investments. Our strategy is to expand our underlying margin at a much higher level than the 10 basis points we reported. And then we use that headroom to then fund what are higher levels of investments in our business, which includes the impact of acquisition. So let me just say that our underlying margin expansion was stronger than the 10 basis points because our investments continue to grow at a rate faster than revenue and that includes acquisitions among other things. Got it. Great. Pynch and good luck to the cavaliers the rest of the way. Gahoos. All right. Thank you. Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Good morning and thank you for taking the question. I was wondering if I could ask a little bit more about consulting versus outsourcing mix. And I guess what I'm referring to is, if you listen to vendors like salesforce.com in their call, and they talk about system integrators becoming ISVs and then we hear Accenture talk about shifting deals towards more outcome based pricing. Is there a way to think about the changes in bookings and revenue between outsourcing and consulting, particularly as we see the acceleration in consulting going forward? Well, I'll make a couple of comments and Pierre may add as well. What I would say is that, I mean the basic answer to your question is no in the sense that what we viewed as consulting is unchanged and obviously likewise the same is true for outsourcing. What we see in consulting is probably a couple of things. One thing we see is that and in fact I guess I would say it this way, at the foundation of what's driving our consulting revenue growth is the depth of our industry expertise and the fact that we really operate not only at the heart of our clients, but at the heart of our industries in terms of being on top of the most important trends and being able to help our clients respond to those trends. And that draws in a lot of our consulting type services. So if you look at Accenture Strategy, Accenture Consulting, you look at Accenture Digital, that brings us right into the heart of the client's high priority agenda because it's all grounded fundamentally in industry expertise. The second thing that is driving our consulting growth is the fact that we are establishing ourselves as among the leaders, if not the leader in the rotation to the new. And when you look at consulting, it includes, by the way, systems integration services, which are included in our consulting type of work and our dimension reporting, they are reflected in app services. But we have a lot of systems integration work over recent quarters associated with clients that are investing in and deploying new technology. And so maybe I'll just stop there, but our consulting growth is really driven by the things that we have been highlighting, which are the priority areas that we are focused on in our growth strategy. Maybe if I could follow-up on the digital growth. It seems as though you're indicating a nice reacceleration in growth there. Anything we can think about in terms of what's causing some of the variability in year over year growth rates that we've seen, particularly after a slight deceleration last quarter and then obviously reaccelerating this quarter. Is it still choppy growth off of lower numbers or is there something else maybe seasonal at play there? I wouldn't read anything into I guess what I would focus on is that in both quarters the growth was north of 20% and then north of 25%. I wouldn't read too much into that. I think our digital growth is going to continue to be consistently strong double digit. And within the context of strong double digit, you might have some fluctuation, but overall the growth is outstanding and we couldn't be more pleased with not only digital, but also the new when you look at the growth that we have in cloud related services and security. No, this is absolutely right. And this is the reason why in my part reporting to you around the business update, I covered Q1 and Q2. I mean, all our business is not driven by quarterly activities. We are selling, operating over a cycle, which is the case for these digital related services. So there is no point you should over read the kind of quarterly results and much more pulling these results in the context of a much longer term. This is what we mentioned that we have for our 7 consecutive quarters of double digit growth. When you look at our digital rotation, Cowenci has been double digit growth for several quarters as well. So what we are pleased with is the consistency and the duration of our growth in digital and overall Accenture and not so much the quarterly situation. Got it. Very helpful. And thank you and nice results. Thank you, Brian. Thank you. Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Good morning, Ashwin. Morning, David. Good morning, Pierre. So obviously, very strong demand metrics as expected. So congratulations on that. My question is, is that the higher level of revenues and EPS is not driving a corresponding rise in cash flow. Why is that? Well, I mean, as we've said before, there are a lot of things that impact our cash flow in a particular year. We have had a couple of day uptick in DSO. That impacts it. The timing of tax cash payments, as an example, from year to year can impact the cash flow. Ashwin, what I really focus on is that our cash flow in the range that we provided, our free cash flow continues to be at a level that is greater than net income. And if you'll remember back to what I've started saying 3 years ago, what I've really focused on is the durability of our business model and generating cash flow in excess of net income. And this year continues that trend and that's the mark of a that's a very distinctive mark for a very successful cash flow generating business. And so we are very pleased with our cash flow. And also remember that the range that we give is $300,000,000 And so it's a fairly broad range. When you think about the fact that we changed revenue, we didn't change cash flow. It is a broad range. But it's you had relative to the very strong consulting, a weaker level of outsourcing growth the last few quarters. You're not alone in this trend. Several other companies are in the same boat. I wanted to ask how much of that weaker outsourcing trend in relative terms is volume versus pricing versus productivity gains because of higher levels of automation, things like that? Yes. We've not quantified it in those 3 buckets. I mean, it's a very smart question to ask. We just haven't quantified it in those 3 buckets. And I don't think we're going to do it on the call even if I had the numbers in front of me, which I don't. What I would tell you, maybe sorry to state the obvious, but all three of those things are in the mix, no doubt about it. We are very pleased with progress that we're making on the automation front in both app services and BPO as well. There is no doubt that in the application maintenance piece of application services that is a highly competitive environment, which does impact the revenue yield per labor hour in that marketplace. But yet it's also important to note, Ashwin, that if you look at pricing as we define it, which is the margin on the work that we're selling, our margin in that AO business is I'm talking about pricing, is holding up quite well. So we're managing the trajectory in revenue per head. We are managing our cost to serve and alignment are actually better than alignment with that trend. And then we've also mentioned that in the market that we're in now, clients are somewhat universally trying to be more efficient in the cost of ownership of their existing application footprint. And why? They want to do that so that they can invest more in the new. And so we're seeing the benefit of that investment in our systems integration business, which is part of our consulting type of work growth. It's also part of the application services growth, which I mentioned was high single digit. So all three of those things are in the mix and we are navigating them all. Yes. Fantastic quarter. Thank you. Thank you. Your next question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Hi, guys. Good morning. Health and Banking and Capital Markets are sectors that some peers have called out some weakness. It doesn't look like Accenture is seeing that same weakness. So I guess my question is, where is or why is Accenture seeing strength in Banking and Capital Markets and Health and what's the outlook there going forward? When you look at our different industries, we have just to set the scene, we have now, what, 13 industry groupings we are reporting against. We're starting that at the IEA. And I'm pleased to report that 9 out of the 13 have enjoyed double digit growth. And so it's quite true across the board. So what explaining and the rationale is the same for Health and for Banking and Capital Market. The growth of our business, the growth of our countries and the growth of our industries is directly linked to the speed of the rotation to the new. It is as simple as this. And fact of the matter is that we invested in those digital related services quite ahead of the curve, certainly at the right time. We've been lucky enough to execute this strategy at the right time. And now all our industries, including banking and capital market, they do benefit from this rotation to the new, again, digital related services plus cloud related services plus security related services. And so when I look at banking and capital markets, a lot of what we do is around the new. And I guess if some of our competitors have lower growth, for me, this is certainly the signal that their business is still too much associated to the kind of current core activities, let's call them classic activities, which might be under pressure. And their rotation to the new is certainly slower than what we are experiencing at Accenture. Okay. That's helpful. And then just as a follow-up, looking at the new guidance for fiscal year 2016, I saw the raise in constant currency revenue growth. But I think the operating margin was decreased about 10 basis points on the high end. Just curious on the reason for the change in operating margin guidance. Thanks. Congrats, by the way. Thank you very much, Brian. First of all, our strategic objective is to land the fiscal year within that 10 to 30. So that is what we're focused on, and we balance multiple objectives in any given year, but within that target range. So this year, if you look at where we are on a year to date basis, and when we reflect not only on the investments that we've made year to date in our people and our business and we reflect on the investments that we want to continue to make in our people and our business during the second half of the year, which are clearly in the best long term interest of our shareholders and investors, The right balance between what we deliver and reported margin expansion this fiscal year and what we need to do to invest in our business and people is 10 to 20 basis points this year. And so it's within kind of that target range that we have and it just reflects the balance that we're making between delivering margin expansion, but at the same time continuing the very successful track record that we've had of investing in our business and positioning those investments for future year returns. Your next question comes from the line of Darrin Peller from Barclays. Please go ahead. Thanks guys. Look, I just want to start off with the inorganic growth for a moment. I mean, obviously, a number of deals have been coming on and I think you said 2% was the contribution, which is similar to what you said at your IA Day. So that's consistent. I just I wonder if how much of these deals are really being dedicated towards this digital initiative that you've really been able to expand so well? And I guess bigger question is, going forward, how much more do we need to keep doing on that front to enable Accenture to stay ahead of the curve on digital? Is inorganic going to become 3% or 4% of your growth rate in the next couple of years as in order to really maintain differentiation, just if you could help us out with that? Yes. On this question, if you look and I think we reported that recently, that on all if you take fiscal year of 15 acquisitions, 70% of the 38 acquisitions we made was digital related. And the one which are not 100% digital related been more around deep industry expertise, and I've been highlighting a few. And some we are making from an industry standpoint would cover both topics. But let's say it's a strong 70% and the other 30% will be more reinforcing our industry with niche acquisition with extremely deep experts. So far, our planning is to continue with the trajectory we set and we communicated to in the I and A in a way which is very consistent in the range of deploying 20% to 30% of our free cash flow. Yes, dollars 900,000,000 to $1,000,000,000 this year, which is representing $900,000,000 to $2,000,000,000 ish in term of cash flow being deployed in our acquisition that would typically in our model account for a 2% contribution to our growth. Okay. This is still our mindset. Now if we have the opportunity to flex because there are great opportunities in front of us, we will remain flexible. Okay. All right. Well, I just wanted to figure out if these deals are part of the impact on the free cash conversion we're seeing. I mean, I know you say it's still within the range, but I guess that's really what we're getting some questions on. It's just as much as that's definitely enabled to drive you to differentiate yourself and grow well better than most in the industry, there's just some people asking about financial implications on the rest of the model. Maybe, Dave, if you could just add anything, Tien Tsin, there's a little bit of a follow-up to that question also. Again, if you I would focus by the way, it's not an inorganic I don't even want to say issue because it's not an issue. The inorganic is not driving a notable impact on our cash generation. Again very simply, I would point to 2 things. Number 1 is that although we continue to have exceptional DSOs, they have ticked up, right? And so a day or 2 of DSO has an impact on our cash flow. And the second thing is just the timing of large tax cash payments as an example, which can fluctuate. If you look structurally at our cash flow model and what drives our cash, really fundamentally nothing's changed. Okay. All right. That's helpful. Just last follow-up on the resources side. I mean, it's been pretty impressive to us that you've been able to maintain growth at all in that area, just given the macro backdrop across resources. And so, I mean in terms of trajectory, I know it's 4%, it's lower than the rest of the business. But again, for us, just seeing growth at all was pretty impressive. Do we should we expect to see that vertical continue? When you talk about resources, you have really 2 stories in resources. We're covering 3 industry segments. Of course, 2 of these industry segments are impacted with the overall natural resources and commodity pricing downturn. And the other one, I'm thinking about energy and what we're calling C and R or natural resources. And then you have utilities. And in utilities, it is one of our fastest growing industry, about 20% growth in the quarter, just to set the scene publicly, because it's explaining. Otherwise, I can see your question. You're positive with 2 industries, what's explaining that? What's explaining that is our resources leadership, we don't gauge at the same time in 2 rotations, if you will, to put it very simply. They are rotating to higher growth and higher potential industries. And today, it is from energy to utilities and then rotating this industry to the new. And if you look at utilities, it is at the same time the 20 plus percent growth is significantly fueled by the rotation to the new. I'm pleased to mention that because sometimes we believe the rotation to the new is more for the business to consumer kind of industries, I mean, banking, the insurance, the comp, the retail, the consumer goods and so forth. But at Accenture, the rotation to the new is big even in the B2B business. And what we've been doing in utilities, especially providing superior services in term of IoT, in term of grid management and bringing the digital at the heart of the utilities operation is creating supernormal growth for utility balancing the downside. And this is making this opportunity to share with you that that's why we like so much our diverse portfolio of business and diverse portfolio of industry, which is for us absolutely critical in our ability to continue delivering sustainable and predictable profitable growth. All right. That's great color. Thanks guys. Thank you. Your next question comes from the line of Dan Perlin from RBC Capital Markets. Please go ahead. Good morning, Dan. Good morning. How are you? Fine. How are you? Yes, I'm doing good. Just a couple of questions real quick On the consulting growth, it clearly continues to be impressive. I'm just wondering to what extent if there is any that you feel like you're benefiting from some of this global M and A, not so much the M and A you've done, but what companies are doing who represent your clients. You mentioned system integration work and investments in new technology, but I'm wondering if there's a lot of integration that's going on as a result of some of this other global M and A. Yes. And the answer is yes. I guess, indeed, whether we have the opportunity to talk about it, but for these last couple of years, we said that you have 2 massive growth driver in the marketplace at the high level. 1 is the digitalization of the industries, which is huge, massive, pervasive everywhere. And coming together with what you're calling the rationalization of the operations. And the rationalization of the operation, this is what's driving good growth in the rest of the business, the non digital specific business, in application outsourcing, in application services, in business process outsourcing and that kind of services. You're right that this last 6 months or 6, 7 months, we've seen a third engine kicking in, which I would call consolidation, what you're calling M and A. So we have digitalization, rationalization and indeed we are adding consolidations. And we are given a very good position with Accenture Consulting operating at the heart of our clients' businesses and quite connected to the C suite. We are a partner of choice in some of the major consolidation ongoing on the planet. So we have the third engine kicking in. Yes. That's fantastic. And my follow-up, in the past, you've I think, sized or given us a little bit more details around, what how big now at this point in the business, you have digital and you have cloud and you have security in the past, like you've said somewhere around $7,000,000,000 or something to that effect, relative to the legacy ERP, which is the constant question we get. And so I'm wondering if you're willing to update us on that. And if you are, are you just at a point now in that kind of cycle where that digital agenda is just so much bigger that it dwarfs this legacy tale that you would have had in the year? Thanks. Well, I think Pierre might have had in his script that if you look at the new digital cloud and security, that is approaching 40% of our revenue. So you can just do the math off of our revenue to get the dollars. On the ERP, the ERP business continues to be under 20% of our total revenue. Now, I will say that we have seen some growth in the ERP space. And so we have always expected that ERP is fundamentally the technology backbone for how companies manage their business. We never felt like the ERP business was going to go away. We always have anticipated a cycle where there would be investments in next generation ERP and we're part of helping our clients move to next generation ERP. So we are seeing some growth in ERP and we're very pleased with our ERP business. Yes. And maybe I mean we are using or I'm using this language a lot that it's all about the rotation of the business As we speak, and I believe that the main difference between the winners and the losers is coming from the one who are able to rotate to the high growth areas and to rotate at speed. When you look at ERP, as David just said, all our strategy in the down cycle was to start building capabilities to rotate our ERP to new ERPs. And at the time, we were calling as an illustration, building capabilities, strong capabilities with HANA, which is going to be the next generation and S4, the next generation of ERP with SAP. I'm taking that as a registration. And guess what? As we speak, given the investment we made ahead of this HANA S4 wave. Today, we are already the number 1 in implementing S4 and HANA in the world. We see clearly, and you've seen probably with the result of SAP, a pickup on this new ERP development. And if you move beyond the strict definition of ERP to the broader definition of application packages, then it's even more spectacular in terms of Accenture positioning. We are enjoying good growth in all the application package and especially with the new SaaS packages. And I'm very pleased with the growth we're entering with Salesforce. I'm very pleased with the growth we have with Verde, with Microsoft Dynamics and some other application package services. So we benefit from having rotating our ERP, the next generation of ERP and plus having taken a leadership position in this new application package. So all in all, this business is growing. Excellent. Thank you. Thank you, Diane. Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Hello, Lisa. Good morning. Hi, good morning guys. First, just David, one quick follow-up question on the operating margin outlook for the year. You mentioned you've changed your investments, I guess, for the rest of the year and as a result made a different trade off there. Can you just give some examples of what some of those investment areas are that you decided to accelerate for this year? I wouldn't characterize it as so much of a change. I mean, remember, 10 basis points off the top is $30,000,000 And so it's really we are executing very well, Lisa, against the investment plan that we really started the year with. And on the inorganic front, we are certainly well positioned to spend probably at the upper end of that range of $900,000,000 to $1,000,000,000 So we would be closer to $1,000,000,000 We continue to invest in our assets and offerings and our people, etcetera. And so I wouldn't say that there's that we have set a new trajectory. It's just if you look at the aggregation of our results, you look at where we are year to date, you look at our planned investment spending for the second half of the year, which is not materially different from where we started, we just think that the more likely landing zone is in that 10 to 20 basis points. But the point, Lisa, that I would reinforce is that it would be incorrect to interpret that as, let's say, a shift in the underlying economics of our business because underneath that, we're driving much more headroom in our P and L. So our ability to drive profit improvement in our underlying business is alive and well. It's just that this year, the level of investments and the other factors will put us more in that 10 to 20 basis point range. Got it. Okay. And then a follow-up on the macroeconomic side. Given the global and sector diversity in your business, can you just give an idea of sort of where now 3 months in to the year, where you're seeing overall IT budget settle out? And then also how much of the digital and the new work is being funded out of IT versus out of other parts of your clients' budgets, like outside the IT budget? Yes. I mean, when you look when I look to into the market, to be honest, I do not see much changes as we speak. And just to be more specific, I think I always said it was in October that the overall economic environment is sluggish to say the least and it is still sluggish. So we can't expect much regarding the environment. It's unstable, risky, extraordinary complex. That was the case last year. It's still the case this year. When I'm looking at the budget from our clients, I'm not noticing any significant change. Again, it's this story around the 3 drivers now. Digitalization, all industries are investing in digitalizing their operations because all the leaders and all these industries are subject to disruption and to massive disruption. So that's what the new factor in town. It's not about being better. It's not about getting more productivity. It's about not being disrupted. And not being disrupted, but not disappearing in the marketplace. This is the right. So I see this cycle is here for quite a while and they have to invest. Now where the money is coming from is through rationalization of the operations. I mean cost reengineering, IT efficiency, it's all of this and it's across the board in many organizations. It's coming from IT, but as well it's coming from all the business lines looking at rationalization, which of course is driving good business for our Accenture strategy or Accenture consulting practices to do business process for engineering and profit improvement. We have the rise of what we call the I mean the ZBB and the work we've been doing, one is very public with Mondelez, which now is representing probably the benchmark of how you transform the cost of the organization. And if you look at more efficiency, you have, of course, the consolidation. And you see some ways of consolidation, especially in resources, especially in chemical. Of course, the DowDuPont is the perfect illustration of the kind of consolidation that's happening. I can mention a few as well in the telecom given the need to get to a superior level of productivity. So I would say the environment is for us more or less the same around these 3 drivers and in an economic context, which is non inspiring. Terrific. Thanks guys. Thank you, Lisa. Greg, we have time for one more rather quick question and then Pierre will wrap up the call. Okay. That question comes from the line of Edward Caso from Wells Fargo. Please go ahead. Good morning, Ed. Good morning. Thanks. Congrats on another great quarter here. My first question is around Avatair. What kind of contribution did that provide revenue margin and EPS before? And I assume this is cash flow to the company over and above that $4,000,000,000 number? And are you planning anything special for that? Yes. So we have not disclosed previously and so I don't think we would do it now in terms of the economics, the full economics of Navitaire as we owned it. I think from a revenue standpoint, we did give the size or we did not give size. No, so Ed, we've not commented on that, so I'm not going to do that now. In terms of the proceeds from Navitaire, we just put that in the mix. And it's in the mix of our capital allocation plan, and we look at that in the mix and then execute our capital allocation strategy against our total cash of which Navitaire is now a piece of that. But we don't think about carving it out and saying, now how are we going to use this piece outside of our normal capital allocation strategy. And so just to be clear, though, the free cash flow guidance does not include the $600,000,000 And then the follow on question is, so your balance cash levels have gone steadily down over the last few years. Is there some minimum level of cash that you're targeting? Yes. So, we are very comfortable against what we view our minimum level of cash to be. And so we are not concerned at all about our cash balance and in any way don't think that we are touching or have any issues in terms of the minimum cash that we need to run the business. Navitaire is in our free cash guidance. So it is part of the mix. But we're very pleased with our cash position. I mean, we anticipated that it would it's progressing exactly as we anticipated and we think by the end of the year, we'll be our cash balance will be pretty close to where we started. So we're in a very strong cash position, and of course, we have a lot of opportunities for other sources of capital should we ever decide that we need to do so. Thank you. Thank you. All right. It's time to wrap up and thanks again for joining us on today's call. Just saying a few words in closing and especially when I see the momentum we have created in our business, when I see our rotation to the new and our gains in market share combined with our continued investment to build a more differentiated Accenture, frankly, I feel very confident in our ability to deliver against our revised business outlook for fiscal year 2016 and importantly to continue delivering value for our clients, for our people and for our shareholders. So we look forward to talking with you again next quarter.