Accenture plc - Class A (ACN) — Q3 2015 Earnings Call Transcript

Thank you, Brad. And thanks everyone for joining us today on our third quarter fiscal 2015 earnings announcement. As Brad just mentioned, I am KC McClure, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, 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 third quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the fourth quarter and full fiscal year 2015. 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 reimbursement or net revenues. Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During 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 conference call. Now let me turn the call over to Pierre.

Thank you, KC, and thanks everyone for joining us today. We delivered excellent results for the third quarter, building on the momentum we created in the first half of the year. I am particularly pleased that our strong third quarter performance was again broad-based across the different dimensions of our business. We gained substantial market share and accelerated our growth in digital-related services. Here are the few highlights. We delivered strong new bookings of $8.5 billion, bringing us to $25.5 billion year-to-date. We generated very strong revenue growth of 10% in local currency, with growth across all five operating groups and all three geographic regions. We delivered earnings per share of $1.30 on an adjusted basis, a 3% increase. We expanded operating margin 20 basis points to 15.4% on an adjusted basis. We generated solid free cash flow of $1.3 billion, and our balance sheets remained very strong ending the quarter with a cash balance of $4 billion. And we returned $1.2 billion in cash to shareholders through share repurchases and dividends. So we have delivered very strong performance for the third quarter and as we enter the fourth quarter, I feel very good about where we are and what we have achieved for the year-to-date. Now, let me hand over to David for more details. Over to you, David?

Thanks, Pierre, and thanks to all of you for joining us on today’s call. As you heard in Pierre’s comment, the strong momentum that we established in our business continued in the third quarter as we delivered excellent financial results. We are very pleased with the ongoing execution of our growth strategy underpinned by strong operational discipline. The underlying business drivers and key themes in the third quarter were very consistent with the past two quarters. And importantly, we again delivered on all three imperatives for driving shareholder value. Starting with durable revenue growth, even with the tougher comparison this quarter, we delivered 10% growth in local currency, which represents the third consecutive quarter of double-digit growth. Once again, our broad-based growth demonstrates the strength of our diversified business and our ability to drive growth above the market resulting in increased market share. With respect to sustainable operating margin expansion, we continue to drive value from our strong growth by expanding operating margin 20 basis points, while continuing to invest in our business and our people. And finally, regarding strong cash flow and disciplined capital allocation, we generated $1.3 billion in free cash flow and returned roughly $1.2 billion to shareholders through repurchases and dividends. We are on track to deliver free cash flow in excess of net income for the full year and while we continue our disciplined approach of returning cash to shareholders, we also remain focused on investing in our business to acquire scaling capabilities in key growth areas. So we're very pleased with the third quarter, as our results continue to demonstrate the durability of our growth, profitability, and cash flows. With that said, let's now turn to some of the details starting with new bookings. New bookings were $8.5 billion for the quarter. Consulting bookings were the second highest ever at $4.5 billion, reflecting a book-to-bill of 1.1. Outsourcing bookings were $4 billion also with a book-to-bill of 1.1. We were pleased with the volume of bookings for the quarter, especially when you consider the significant headwind due to foreign exchange impacts. The major themes in our new bookings were consistent with last quarter. We saw continued strong demand for both digital-related services and operations, and new bookings for application services and consulting related services landed within our book-to-bill target range. Finally, we had 12 clients with bookings in excess of $100 million, giving us 33 year-to-date, which signifies the unique and trusted relationship that we have with many of the largest companies in the world. Turning now to revenues, net revenues for the quarter were $7.8 billion, slightly positive growth in U.S. dollars and an increase of 10% in local currency, reflecting a negative 10% foreign exchange impact, compared to the negative 11% impact provided in our business outlook last quarter. Adjusting for the lower FX headwind, we still came in well above the top-end of our guided range. Consulting revenues for the quarter were $4.1 billion, up 1% in USD and 11% in local currency. Outsourcing revenues were $3.7 billion, flat in USD and an increase of 10% in local currency. Looking broadly at the major drivers of revenue growth in the quarter, the trends we’ve seen in recent quarters remain very consistent. The dominant drivers were very strong double-digit growth in digital-related services and operations, while application services continued to grow in the range consistent with our overall rate of growth and strategy, and consulting services combined continued to grow in mid-single digits. Turning to the operating groups, Communications, Media and Technology continued to lead all operating groups with 17% growth in the quarter. While growth continued to be broad-based, it was most significant in North America, the growth markets, and communications globally. The drivers across CMT continued to be digital-related services, cost rationalization, several large transformational projects, and demand for network-related services. H&PS grew 10% in the quarter. We again saw significant growth in our Health business, particularly in the public sector at U.S. Federal clients and our Medicaid-related projects at state clients. Digital-related services and operations, particularly BPO, were also strong growth drivers. Financial Services also grew 10%, with significant growth in both capital markets and insurance. Clients continue to be focused on three main areas, risk and regulatory, cost optimization and digital-related services, especially in distribution and marketing. Products grew by 8%, led by very strong growth in consumer goods and services, life sciences, and automotive. Clients continue to be focused on digital-related services and operational effectiveness as they position themselves to be more competitive in the marketplace. Resources grew 6%, continuing the recent trend of positive growth in all three geographic regions and all industries except energy, with particularly strong growth in utilities. The pattern of broad-based growth for outsourcing-related services continued as clients remain focused on operational efficiency and cost rationalization. Moving down the income statement, gross margin for the quarter was 32.5%, compared with 32.8% for the same period last year, down 30 basis points. Sales and marketing expense for the quarter was 11.3% of net revenues, compared with 11.6% of net revenues for the third quarter last year, down 30 basis points. General and administrative expense was 5.8% of net revenues, compared with 5.9% of net revenues for the third quarter last year, down 10 basis points. As I mentioned in quarter two, this quarter we recorded a non-cash settlement charge as a result of an offer to former employees to receive a voluntary lump sum cash payment from our U.S. Pension plan. This $64 million charge impacted quarter three operating margin by 80 basis points and diluted earnings per share by $0.06. The following comparisons exclude this impact and reflect adjusted results. Operating income on an adjusted basis was $1.2 billion in the third quarter, reflecting a 15.4% operating margin, up 20 basis points compared with quarter three last year. Our adjusted effective tax rate for the quarter was 25.7%, compared with an effective tax rate of 25% for the third quarter last year. Net income on an adjusted basis was $889 million for the third quarter, compared with net income of $882 million for the same quarter last year. Our diluted earnings per share on an adjusted basis were $1.30, compared with EPS of $1.26 in the third quarter last year. This reflects a 3% year-over-year increase. Turning to DSO, our day services outstanding continue to be industry-leading. They were 37 days, up from 35 days last quarter. Free cash flow for the quarter was $1.3 billion resulting from cash generated by operating activities of $1.4 billion, net of property and equipment additions of $114 million. Moving to our level of cash, our cash balance at May 31st was $4 billion compared with $4.9 billion at August 31 last year, down $900 million as we’ve returned over $3.1 billion to shareholders through repurchases and dividends year-to-date. Moving to some other key operational metrics, we ended the quarter with a global headcount of about 336,000 people, and we now have approximately 237,000 people in our global delivery network. In quarter three, our utilization was 90%, down from 91% last quarter, attrition which excludes involuntary terminations was 15%, compared to 14% in both quarter two in the same period last year. Lastly, we now expect that approximately 95,000 people will join our company in fiscal '15. So turning to our ongoing objective to return cash to shareholders, in the third quarter, we repurchased or redeemed approximately 5.6 million shares for $518 million, at an average price of $93.11 per share. Year-to-date, we purchased 20.8 million shares for approximately $1.8 billion, at an average price of $86.16 per share. At May 31st, we had approximately $3.2 billion of share repurchase authority remaining. Finally, as Pierre mentioned, on May 15, 2015, we made our second semi-annual dividend payment for fiscal '15 in the amount of $1.02 per share, bringing total dividend payments for the fiscal year to approximately $1.4 billion. So with three quarters in the books, we’re extremely pleased with our results and are now focused on quarter four and closing on a strong year. As always, we’re working hard to continue to manage our business with a high degree of rigor and discipline which enables us to deliver on our near-term objectives while also investing for long-term market leadership. Now let me turn it back to Pierre.

Thank you, David. Our strong results for the quarter and year-to-date demonstrate that we’re benefiting from the investment we've made in key growth areas such as digital. And I'm very pleased with the leadership position we are establishing in this important part of our business. In the third quarter, we delivered more than 30% growth in local currency in digital-related services, which now account for more than 20% of our total revenues. Demand for digital is pervasive across the entire business. And we’re leveraging our digital capabilities in the services we provide to clients in every industry around the world. Here are some examples. We are helping Pizza Hut build and operate the new club-based digital platform to enhance the customer experience and boost online sales. The new platform will also enable Pizza Hut to expand its digital marketing capabilities through enhanced customer segmentation, analytics, and mobility. We are working with a leading global shipbuilding company to deploy an Internet of Things connected platform to enable real-time monitoring of its shipping fleet. We will use over 100 different kinds of sensors to provide predictive maintenance and spare parts optimization. And we are helping Rio Tinto, the global mining company, accelerate its journey to become a digital business by migrating its enterprise IT systems to an as-a-service solution on the Accenture Cloud platform. Rio Tinto expects to realize significant cost savings, as well as increased agility, from the consumption-based pricing model. At the same time, we continue to invest to further differentiate Accenture and to scale our capabilities in order to capture new growth opportunities in the marketplace. In Accenture Strategy, we announced two acquisitions in the third quarter that further enhanced our capabilities. We acquired Axia Limited, a U.S.-based strategy services provider with expertise in life sciences, health, and consumer goods industries. And in May, we announced the acquisition of Javelin Group, a U.K.-based strategy consulting provider with significant digital expertise in the retail industry. In Accenture Digital, we are rapidly scaling our capabilities to bring innovative solutions to clients to enable digital transformation. Just last week, we announced that we are joining forces with Fast Retailing in Japan to develop digitally enabled consumer services across the retailer’s seven global brands, including UNIQLO. Through this joint initiative, we are developing new digital business models to drive transformation in the retail industry and beyond. We opened the Accenture Interactive Innovation Center at our technology lab in Sophia Antipolis in France. This is all about providing clients with an immersive experience that brings to life the latest digital technologies for engaging with customers in new and innovative ways. We are expanding Fjord, the leading design and innovation group within Accenture Interactive. We recently opened new design studios in Sao Paulo, Milan, and Sydney and now we have 15 Fjord design studios around the world. With Accenture Mobility, it is now one of the world's leading developers of mobile apps, leveraging the capabilities of our global delivery center. We have now developed over 1000 apps across nearly all industries. Turning to the geographic dimension of our business, in the third quarter, we delivered strong growth in local currency and gained significant market share across all three of our geographic regions. In North America, we delivered very strong 12% revenue growth in local currency, driven by continued double-digit growth in the United States, where we are strengthening our position as the market leader. In Europe, I'm very pleased with our growth of 7% in local currency, driven primarily by Spain, the United Kingdom, Germany, and the Netherlands. In growth markets, we delivered very strong revenue growth of 13% in local currency driven by double-digit growth in Japan, Australia, and Brazil, our largest markets in this region. So with the first three quarters of the year behind us, I'm extremely pleased with our results. We have accelerated momentum in our business and I feel confident that we are well positioned to deliver a very strong fiscal year '15. In a market environment that remains uncertain and fast changing; innovation, agility, and flexibility are more than ever the name of the game. And we remain extraordinarily focused on executing our strategy to deliver sustainable profitable growth. With that, I will turn the call over to David to provide our updated business outlook for fiscal year '15. David, over to you.

Thank you, Pierre. Let me now turn to our business outlook. For the fourth quarter of fiscal '15, we expect revenues to be in the range of $7.45 billion to $7.70 billion. This assumes the impact that foreign exchange will be a negative 10% compared to the fourth quarter of fiscal '14. For full fiscal '15, based upon how rates have been trending over the last few weeks, we now assume the impact of FX on our results in U.S. dollars will be negative 7.5% compared to fiscal '14. For the full fiscal '15, we now expect our net revenue to be in the range of 9% to 10% growth in local currency over fiscal '14. For the full fiscal '15, we continue to expect new bookings to be in the range of $33 billion to $35 billion. As I mentioned previously in May, we recorded a non-cash settlement charge of $64 million, which will impact full year '15 operating margin by 20 basis points and diluted earnings per share by $0.06. Our guidance for full year fiscal '15 excludes this impact. For operating margin, on an adjusted basis, we continue to expect fiscal '15 to be 14.4% to 14.6%, a 10 to 30 basis point expansion over fiscal '14 results. On an adjusted basis, we continue to expect our annual effective tax rate to be in the range of 26% to 27%. For earnings per share on an adjusted basis, we now expect EPS for fiscal '15 to be in the range of $4.73 to $4.78 or 5% to 6% growth over fiscal '14 results. This EPS range includes $0.02 increase due to the lower FX headwind and a $0.05 increase to the lower end of the range as a result of narrowing the revenue growth range. Turning to cash flow for the full fiscal '15, we now expect operating cash flow to be in the range of $3.8 billion to $4.1 billion, property and equipment additions to now be approximately $400 million. And we continue to expect free cash flow to be in the range of $3.4 billion to $3.7 billion. Finally, we continue to expect to return at least $3.8 billion through dividends and share repurchases, and also continue to expect to reduce the weighted average diluted shares outstanding by approximately 2% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let’s open it up so we can take your questions. KC?

Thanks, David. I’d ask that you each keep to one question and a follow-up to allow as many participants as possible to ask a question. Brad, would you provide instructions for those on the call please?

Hi, guys. Good morning. Pretty good results here, looks very similar to last quarter. I saw that digital accelerated though up towards 30% on a constant currency basis, I think, that was up from 20%? Just curious if that offset anything that slowed or anything that was weaker than last quarter?

No. I don’t think it’s indicative of a weakness in another area. Last quarter we said digital growth was over 20%. And we did see an uptick and I think some of the drivers behind that were pretty evident in Pierre’s comments, as he described our Digital business and how it continues to evolve in a very positive way.

Okay. And just as a follow-up, I saw the operating cash flow adjustment for the full year, just curious what caused that? And then how much did acquisitions contribute to the revenue growth? Thanks.

The acquisition growth continues to be in the range of what we’ve talked about before, so in that 1% to 1.5% range. On the cash flow, there's really not anything notable. There are some puts and takes in there, but really not anything significant to note.

Good morning. Great results. I’d like to ask about the gross margin, if possible, as it was definitely better than we expected. I’m curious if this trend is sustainable and whether we can return to what we saw in the first half. Ultimately, I'm trying to understand if some of the drivers, such as contract profitability and the use of subcontractors, are performing better.

When I assess profitability, I want to reaffirm what I focus on regarding our third-quarter results. First, I examine the trend in our contract profitability, which we were happy to see improve year-over-year for both consulting and outsourcing, as well as overall. This positively impacts our gross margin, but it’s not the sole factor. Second, I evaluate our labor costs in relation to revenue growth, which has continued positively, similar to the first half of the year. We are pleased with how well we've managed labor costs while still investing in our people through promotions and salary increases, including those taken in the third quarter. I primarily look at these two aspects to determine if we are building the capacity to invest in our business while also driving profitability and expanding our GAAP margins, as well as our adjusted margins in line with our external goals. All of this progressed as we planned in the third quarter. Regarding gross margin evolution, we do not provide guidance or forward-looking statements since our focus is on operating margin, which can fluctuate throughout the year. However, if we see the right trends in contract profitability and payroll efficiency, then everything will align from a profitability perspective, which is our focus.

All right. Great, and that’s helpful context. As my follow-up, I know Bryan asked about acquisitions, but I wanted to inquire about your philosophy regarding whether we should expect more of the same in terms of acquiring or integrating some of these smaller businesses. I'm curious about the importance of culture and if there have been any surprises regarding the retention of individuals you've brought in through these deals. I'm trying to understand retention and how the culture is integrating. Additionally, if your philosophy could evolve, is there a possibility for larger deals given your strong interest in acquisitions? Thanks.

We have been very pleased with our experience with the companies we've acquired over the past two to three years. To date, we have acquired approximately 45 companies, which means we are quite experienced in executing our inorganic strategy. A crucial aspect of this strategy involves how we integrate and assimilate the companies we purchase. Being a people-based business, we focus on integrating the personnel from these acquired companies. Our experience has been positive regarding the retention of these individuals and their quick adaptation to our culture. Additionally, the financial returns have generally met or exceeded our expectations.

No. Absolutely. I mean, we all have been very clear on our acquisition strategy. Do we want to leverage our cash to make acquisitions in order to further enhance our capabilities and get more differentiation? The answer is yes. We are looking at acquisitions in some very specific areas as you know, from deep expertise in consulting and strategy from an industry standpoint to digital native organizations to companies with a deep footprint in operations, I’m thinking about Procurian as an illustration and we will continue to do so, and look at the kind of acquisitions we believe we could get an excellent return and they’re going to further improve our differentiation, our competitiveness, and our relevance in the business. And so far, frankly, I'm very pleased. I found even David a bit neutral on this, less neutral, I think we have an excellent return on the investment we made. It is making an impact in the marketplace. I’m thinking about Fjord, I'm thinking about Acquity, I’m thinking about Procurian, where clearly we are taking leading position in these different areas, not only we have a good retention, but we’re scaling further the acquisitions we made. We announced in this call that we are significantly and rapidly scaling Fjord, our design and innovation studio in Accenture Interactive, and we are now 15 design studios around the world and more to come. So we will continue executing the strategy against the parameters we set and we will continue to further improve Accenture.

Good morning and thank you for taking the question. I was wondering if I could dig in a little bit on Health and Public Services. And given the contract wins you have there, particularly some of the material ones in the state and federal business, what impact do those wins have on your profitability, particularly as we hear some of your competitors, as they bring on some of these larger contracts are less profitable upfront, how do you manage those and how can we expect that segment to kind of grow in contribution to profitability going forward?

Yeah. We’ve been very pleased with the progression of our profitability in H&PS broadly and in Health specifically. When you're talking about some of the recent wins, of course, we don’t talk about contract specifics, but as a general philosophy, we’re in the business of driving profitable growth and we look at every client and contract opportunity against that objective. And so we don't put businesses on the books that doesn't support our near-term and really mid and long-term financial objectives. So we're quite pleased with the health of our Health and Public Service business. We are actually very excited about the opportunities that we see in Health, which is growing strong double digits as an industry and are very encouraged about what the opportunities in the future hold for us.

Oh! Yeah. I am very pleased with H&PS. It’s certainly an area where we invested wisely in getting the return. As mentioned by David, the Health segment has been growing double-digit for many years now, many quarters in a row. And if I am looking at our business in both federal or in local and state, it’s exactly moving in the right direction and growing, and all this H&PS business is accretive to Accenture. So we are pleased with that. And again, it's all a question of how you differentiate the type of services you are providing. In Healthcare, we decided to be extremely digital-rich by being among the first to deliver digital health we call, connected healthcare, and a very significant differentiation in healthcare; if you look in terms of Public sector, we have been among the first to launch the local exchange insurance centers and you know how much it’s important now. In federal, we recently invested in Agilex to bring more digital rich services in the context of our Federal business. So, again, for us the name of the game is always the same is to avoid commoditization and low value services in each and every industry, and to relentlessly focus on where we could bring innovation and differentiation in each and every industry at Accenture.

Okay. That’s very helpful. Could I follow up on some of the earlier comments about mergers and acquisitions? Are you noticing any changes in the competitive landscape with smaller, potentially more specialized firms due to the recent M&A activities in the market? Specifically, as you compete with them for certain contracts, are your win rates changing in any way?

No. I don’t think we see any significant change in old landscape from an acquisition standpoint. Everybody is trying to find the right nugget and the right company. So far David mentioned that we acquired between 40 and 50 companies in these last three years. We are in the range of 45 and we are pleased with the company we integrated and it’s a very competitive market, because everybody is looking to buy companies who are going to bring differentiation. I think we are differentiating ourselves in this acquisition market with our brand. I tend to believe without being arrogant at all that our brand is serving us very well as a magnet for talent. We have a very strong brand, highly recognized companies we are contacting, are recognizing that Accenture is a good company to work with, with a good culture, with a good client service DNA and always trying to do the right thing. And in the acquisition environment I think an excellent reputation of strong brand and being recognized for performance culture and operating with seriousness is a competitive advantage.

Hey. Good quarter guys. Maybe going to app services, you guys mentioned that was an area of strength. So, one, just curious as to how much app services did you see still hidden within companies that you could pull out approximately driving a multiyear growth rate there? And then, secondarily, Pierre, that you start to get more competitive and going after business against the Indian outsourcers, is that the case and is that a bit of a change of strategy?

Yes. I am very pleased you are asking a question with what we are calling now at Accenture Application Services, because indeed it's a very important business for Accenture. It's a very significant part of the technology market and we have set a very specific strategy to compete in application services on both ends of this market. On one hand of application services, you have application development and maintenance and in Accenture, we are extremely competitive with our global delivery network. In this market, which is more market where you need to rationalize the technology operations of clients. And then on the other hand of this application services market you have the capability building, solution building and Accenture as well is very well-positioned to capture the opportunity to build new solutions in application services. So all our jobs with our clients is to look at this application services and to make sure that the money if you will they are saving in application maintenance and development through leveraging offshore, through productivity, through automation, which we provide a lot will be reinvested in capability building and new technology solutions. And Accenture operating on both sides and as both ends of this spectrum is in a very good position to be the partner of our clients in making this reinvestment possible. And that’s why I am very pleased to see that all-in-all application services at Accenture is growing very well again this quarter.

Right. Absolutely. Okay. And the quick follow-up is on the Consulting side, any change or maybe, let me ask it this way, who do you see the most from the Consulting side, especially in the U.S.? Thank you.

When competition remains quite traditional, we don’t see much change. In Consulting, we typically compete against what is commonly referred to as the Big Four. This includes companies like Deloitte and KPMG, and we are particularly focused on competing against Deloitte among others, and we welcome that.

Hey, guys. Good morning. Can you do a quick update on the four cost-related initiatives that you had laid out at your Investor Day last fall? Particularly in light, I guess, to kind of, I'm looking at the headcount growth numbers, which have been running ahead of constant currency revenue growth for four quarters or so, which I think implies some pyramid mix shifting, so just could you give us a bit of an update on that front?

We identified four key areas to focus on in order to expand our margins in both the short and long term. First, we concentrated on effectively managing each of the five dimensions mentioned earlier, recognizing that each has a unique economic profile, from market price points to service costs and investment in management. We've made significant progress this year as we elevate our organization in alignment with our new growth strategy, fundamentally restructuring our business around these dimensions. This is evident in our differentiated pricing approach for our Strategy and Consulting Services compared to 18 to 24 months ago. Secondly, we are leveraging our talent-based model, which aligns with these five dimensions to manage our workforce and labor costs more effectively. Our initiatives to develop careers, manage talent, and improve compensation practices are progressing well and have positively impacted our profitability. The third area is portfolio optimization, where we're enhancing the performance of our P&L leaders at Accenture. They are now analyzing the business across the portfolio and making targeted adjustments for optimization. Lastly, we continue to focus on operational efficiency, particularly in our business management functions such as finance, HR, and marketing. We have achieved notable improvements in efficiency across all these areas this year. We are pleased with our progress thus far, although we recognize that there is still work to be done.

Terrific. Thanks.

Yes. Sure. And thanks to hear it from you, Lisa. I hope you are doing well. On operations, indeed, we created something very special. And I’m pleased to have a couple of minutes to mention the good progress and the positioning we’re taking on operation. As you know, in Accenture, we’re not using any more or much more the terminology of consulting and outsourcing and that’s something especially in the IA Day, we will continue to comment on how we seek the market in professional or in business services evolving. And when we created Accenture Operations, we created a very unique capability in the marketplace. I don't believe that anyone else has been building a similar capability with two major capabilities in it, one, which is around infrastructure services, where you will find as much consulting and outsourcing in it. So it's a combination of services from cloud-related services leveraging the Accenture Cloud platform from high value services in security and from indeed infrastructure outsourcing. And the other significant capability is going to be around business process management, if you will, where again, we are providing business processes more and more as a service platform based in the cloud as an illustration and think about what we are doing which is extremely leading edge with procurement where we’re probably the first in the industry to provide procurement as-a-service platform based with an economic model on the consumption and on the pure transaction. So operation is indeed already a combination of consulting and outsourcing. And this is what you’re going to see more and more in Accenture is the richness of the service we’re providing will come from the integration of consulting and outsourcing services in a new economic model only against platforms.

Good morning. Thanks for taking my question. I just want to ask about consulting versus outsourcing for a moment. Consulting continues to get momentum, maybe accelerating but outsourcing seems to be decelerating somewhat. So I was wondering, what you put that down to, is that mainly clients trimming on sort of maintenance to fund strategic initiatives or is there something else and do you see a way to where outsourcing can actually start to inflate higher again?

Yeah, Jim, thanks for the question. Again, let met direct you back to because I think it is important to just reinforce the dot connecting between the consulting and outsourcing and the five dimensions of our business. And again, as we introduced the five dimensions of our business at IA Day, the reason we’re moving in this direction is because this is reflective of where the market is moving. And so again when you look at our five dimensions of strategy consulting app services and operations with digital across all four, if you relate that back to consulting as a type of work, which we’ve talked about the historically, that includes strategy consulting and a part of application services to be clear. And if you look at outsourcing that includes a part of application services in most of operations. And so we really think that it’s more helpful to talk about our business in the new dimensions. And so again if you look at strategy and consulting as more of the traditionally consulting centric part of our business that grew at mid single-digits, again which is a very good growth rate relative to the market. If you look at application services, which has components of consulting and outsourcing, using our historical binocular, systems integration and application outsourcing, that grew mid-single-digit. And the thing that's unique about Accenture in that space as Pierre explained very clearly is our ability to play across the spectrum of services within application services, from the application maintenance side which has a one set of buyer values and economic profile to the deployment of technology, which is part of the application services market space which has a different set of buyer values and economic profile, that grew again roughly at the average of Accenture. So in that 10% plus or minus range and then when you look at operations of the strong double digit. And so really when you think about our business and what's driving the growth, think about it in those terms because I think you’ll find that to be most helpful.

That's helpful. Thanks. And then as a follow-up, just want to ask a question about some color on short-term versus longer dated bookings. Can you maybe give us a sense of what’s the short-term bookings continue to be a dominant source of the growth and can you maybe talk about roughly or if you can quantify, what percentage of revenue was both booked and billed in the quarter versus what that was, say a year ago?

I can't really comment on that part. However, I will mention that we indicated in the latter half of last year and earlier this year that we observed a trend in our bookings where a higher percentage was converting to revenue within a four-quarter period. This trend has remained fairly consistent. We continue to see a significant portion of our bookings from the quarter converting to revenue in the next four quarters, which has contributed to our strong growth rates over the last few quarters, particularly in the third and fourth quarters of last year.

Thanks. So Digital clearly, pretty impressive, it looks like it accounted for roughly 60% of your growth in the quarter. The question that I have more specifically around your labor pool is the cost of the digital labor pool is clearly a lot more expensive. I know you're talking about these pillars managing it but I'm thinking more specifically like what is it in terms of differential as we think about that? And then what specifically are you able to do to manage that talent pool cost because if it's accounting for 60% of growth, I am also wondering is there a headcount correlation that’s starting to decouple a longer term with that pool and that’s going to help it? That’s my first question.

On this labor cost, I mean, what we are doing in Accenture and it’s not different in Digital, is to make sure that we have the right mix of skills and the right locations for our skills. If you look in this digital space, we have now roughly 28,000 people working in that environment. And this 28 is very interesting because you will see as you might suspect extraordinary, I would call them, high calibers. I'm thinking about the business scientists we are hiring. I'm thinking about the PhDs we are hiring to drive algorithm in Accenture Analytics. And I'm thinking as well about some leading-edge designers, we’re all hiring for Fjord, our design group, at Accenture. And on the other side of this spectrum, you will see that we are now one of the largest apps, enterprise apps developer in the world. All this apps development is done in our centers from India as an illustration. And they are marvelous app developers from India and we are leveraging part of the global delivery network for digital to deliver apps services. I'm thinking about Analytics we have as well very strong people in our delivery centers, who are doing analytic work from the GDN and from a lower-cost location. So it’s not different in Digital from the rest of Accenture where we are always looking to put the right people at the right place with the right cost. So we make sure that we have the right skills that we are cost competitive. It’s exactly the same with Digital.

Okay. And then shifting gears for a second, I want to ask an M&A question but not pertaining to the businesses that you want to acquire. It’s more a function of all the businesses globally that have been doing M&A. And I’m just wondering to what extent are you seeing that driving business and maybe let’s just say into your consulting business as I would think you'd be a top of the list company to be thinking about in terms of helping the integration of those companies?

Yes, we are assisting our clients with the integration of the companies they are acquiring. This is a key area for us across all industries we work in. Our capabilities cover the entire range of services related to this process, including strategic planning, consulting to integrate business operations, and rationalizing systems from the acquired companies. We also focus on driving cost efficiencies and expanding our operational capabilities as part of these transactions. This type of work is a common engagement for us with our larger clients.

But is the pace of play on that increasing or similar to what we see in the past? Thanks.

Yeah. Now I think, consolidation has been everywhere. You have some waves in some industries. I’m thinking about we have the very significant wave in banking across '08, '09, '10 and we’ve been one of the leading organizations in doing post-merger integration, lot in communication, when you just reading the papers and see what’s going on in communication. And we might expect more to come in the energy industry for good and valid reasons.

Good morning, guys. I was hoping to drill in a bit if I could on the 11 $100 million, 33 $100 million plus deals that you’ve signed in the quarter and year-to-date. If you would look at those with the lens of the operating groups, is there anything to call out there? Are they more populated in one or the other or did they roughly parallel the growth of the OGs themselves?

I believe that if I reflect on the past two quarters, this quarter is fairly typical. The total for this transaction is around $100 million, which is the threshold we mention each quarter. This amount is well distributed across all our operating groups and also geographically. I am pleased to share that our growth is nicely balanced across various aspects of our business, industries, and regions.

Yeah. Now if you look at the quarter for example and you look at the 12 as I’m glancing at the list, for example, all five operating groups were represented on the list. And so I guess it really reflects as broad-based kind of theme that we've been talking about is that all of the operating groups have as a part of their portfolio, these larger transformational type relationships. And the pattern is really as you would expect.

Thanks David. And to wrap up, it's time for Pierre to provide the closing remarks.

Thank you. So thanks again for joining us on today’s call. Given our performance year-to-date and the strong momentum in our business, I feel confident in our ability to deliver our revised business outlook. The investments we've made in strategic acquisitions, in assets and solutions, and in the skills of our people have produced strong results so far. And we will continue executing our strategy to seize opportunities in the marketplace and deliver value for our clients, for our people, and for our shareholders. We look forward to talking with you again next quarter. In the meantime, if you have any questions, please feel free to call KC. All the best.