Accenture plc - Class A (ACN) — Q1 2018 Earnings Call Transcript

Thank you, Kevin. And thanks everyone for joining us today on our first quarter fiscal 2018 earnings announcement. As the operator just mentioned, I’m Angie Park, 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 for the first quarter. Pierre will then provide a brief update on our market positioning before David provides our outlook for the second quarter and full fiscal year 2018. We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder, when we discuss revenues during today’s call, we’re talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on this call, including our business outlook, are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today’s news release and discussed in our annual report on Form 10-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 on 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, Angie. And thanks everyone for joining us today. We had an excellent first quarter and I am extremely pleased with our results. We delivered strong and broad-based revenue growth across all dimensions of our business and gained significant market share once again. Our strategy continues to differentiate Accenture in the marketplace and we are seeing very strong demand for our services, particularly in digital, cloud, and security. Here are a few highlights for the quarter. We delivered very strong new bookings of $10 billion. We generated revenues of $9.5 billion with 10% growth in local currency. We delivered very strong earnings per share of $1.79, a 13% increase. Operating margin was 15.6%, consistent with the first quarter last year. We generated strong free cash flow of nearly $900 million, and we returned more than $1.4 billion in cash to shareholders through share repurchases and dividends. So, we are off to a strong start in fiscal year 2018 and I feel very good about the continued momentum in our business. Now, let me hand over to David, who will review the numbers in greater detail. David, over to you.

Thank you, Pierre. Happy holidays to all of you and thanks so much for joining us on today’s call. Building further on Pierre’s comments, we were very pleased with our quarter one results which positioned us well to achieve our full year business outlook, especially as it relates to our strong and broad-based top-line growth. Once again, these results demonstrate the durability and resiliency of our growth model and the high degree of relevance and differentiation of our capabilities in the marketplace. Before I get into the details of the quarter, let me summarize a few of the important highlights. Starting with net revenues. We expanded our business by approximately $1 billion in the quarter, with 10% growth in local currency. The diversity and durability of our growth model was evident with strong and extremely well-balanced growth across all five operating groups and all three geographic areas, with double-digit growth in four operating groups in both Europe and Growth Markets. Strong double-digit growth in digital, cloud, and security continued to be the dominant driver of our growth, and it was pervasive across the business. And we estimate that our 10% growth significantly outpaced the market as we continue to gain share and strengthen our position as a leader in the new. With respect to our profitability, our operating margin of 15.6% in the quarter was consistent with quarter one of last year and continues to reflect the significant level of investment in our business. And we delivered very strong EPS of $1.79, which was up 13% compared to last year. Looking at cash generation and capital allocation, our free cash flow of $872 million in the quarter was consistent with our expectations and supports our ongoing objective to invest in our business while returning significant cash to our shareholders. We invested roughly $130 million, primarily attributed to two acquisitions, and returned approximately $1.4 billion in share repurchases and dividends. And we continue to expect to invest approximately $1.1 billion to $1.4 billion in acquisitions during fiscal 2018. With that said, let me turn to some of the details, starting with new bookings. New bookings were $10 billion for the quarter, reflecting 19% growth in local currency over last year. Our consulting bookings were $5.9 billion with the book-to-bill of 1.1 and represented an all-time high. Outsourcing bookings were $4 billion with the book-to-bill of 0.9. Once again, our new bookings were well-balanced across the business, and we were especially pleased with strong bookings in North America and overall in our strategy and consulting business combined. Strong demand continued for digital, cloud, and security, which we estimate represented more than 60% of our new bookings. It’s also noteworthy that we had 13 clients with new bookings in excess of $100 million in the quarter. Now turning to revenues. Net revenues for the quarter were $9.5 billion, a 12% increase in USD and 10% in local currency, reflecting a foreign exchange tailwind of roughly 2%. Our net revenues were $170 million above the upper end of our previously guided range, as a result of stronger than expected performance across every dimension of our business. The consulting revenues for the quarter were $5.2 billion, up 13% in USD and 11% in local currency. Outsourcing revenues were $4.3 billion, up 11% in USD and 9% in local currency. Looking at the trends and estimated revenue growth across our five business dimensions, growth was led by application services and operations, which both posted double-digit growth. We also saw an uptick in strategy and consulting services combined, which grew mid-single digits. And as I mentioned earlier, we continued to deliver strong double-digit growth in digital cloud and security by leveraging the significant investments we’ve made in recent years to build highly differentiated capabilities. Looking at our operating groups, financial services led this quarter with 11% growth in local currency, reflecting strong growth in both banking and capital markets and insurance. Growth was strong across all three geographies, including double-digit growth in Europe and the Growth Markets. Communications, media and technology grew 10% in the quarter, representing their strongest growth rate in seven quarters, driven by continued strong double-digit growth in software platforms, and we delivered double-digit growth in both North America and the Growth Markets, and we’re particularly pleased with the return to strong growth in Europe. Products delivered its 10th consecutive quarter of double-digit revenue growth with 10% growth, led by double-digit growth in consumer goods, retail and travel services as well as industrial. We continue to see strong demand for our services in Europe and the Growth Markets, both of which grew double digits. Resources built further on the momentum established in the second half of last year and delivered a strong quarter at 10% growth. The highlight of the quarter continued to be strong double-digit growth in chemicals and natural resources, and we were also pleased with continued signs of stabilization in energy, resulting in positive growth in the quarter. Finally, H&PS grew 8%, reflecting significant improvement over growth rates in fiscal 2017. We saw strong growth in both health and public service, led by double-digit growth in both Europe and the Growth Markets and strong growth in North America. Gross margin for the quarter was 32.1%, consistent with the same period last year. Sales and marketing expense for the quarter was 10.5% compared with 10.4% for the first quarter last year. General and administrative expense was 5.9% compared to 6% for the same quarter last year. Operating income was $1.5 billion for the first quarter, reflecting 15.6% operating margin, consistent with quarter one last year. Our effective tax rate for the quarter was 20.5% compared with an effective tax rate of 20.4% for the first quarter last year. Diluted earnings per share were $1.79 compared with EPS of $1.58 in the first quarter last year, and again, this reflects a 13% year-over-year increase. Days services outstanding were 43 days compared to 39 days last quarter and 44 days in the first quarter of last year. Free cash flow for the quarter was $872 million, resulting from cash generated by operating activities of $1 billion net of property and equipment additions of $133 million. Our cash balance at November 30th was $3.7 billion compared with $4.1 billion at August 31st. With regards to our ongoing objective to return cash to shareholders, in the first quarter, we repurchased or redeemed 4 million shares for $563 million at an average price of $139.69 per share. At November 30th, we had approximately $2.6 billion of share repurchase authority remaining. Also in November, we paid a semi-annual cash dividend of $1.33 per share for a total of $854 million. This represented a $0.12 per share or 10% increase of dividend we paid in May. So in summary, we’re very pleased with our quarter one results and we’re off to a good start in fiscal 2018. Now, let me turn it back to Pierre.

Thank you, David. Our very strong results in the first quarter demonstrate that we continue to execute our strategy very well and are clearly benefiting from the substantial investments we have made to build differentiated services and further enhance our competitiveness. I am especially pleased with our continued rotation to the new digital, cloud, and security, which again grew at a very strong double-digit rate this quarter. We have been particularly successful with Accenture Digital, nearly tripling the annual revenue from this business since we launched it four years ago. And we have expanded our capabilities to help our clients with their digital transformations. Now, given the increasing importance of artificial intelligence, automation, machine learning, and other innovative technologies, we are evolving Accenture Digital to be even more relevant to our clients and drive even greater differentiation in the marketplace. Going forward, Accenture Digital will be focused on three big areas: Accenture Interactive; Accenture Industry X.0; and Accenture Applied Intelligence. Let me bring this to life for you. We’ll start Accenture Interactive, which is all about serving the CMO and the marketing function, helping the world’s leading brands transform the customer experience. We are working with Maserati to do just that across all of its channels, leveraging our expertise in data-driven marketing, digital analytics, and creative services. We are also strengthening our end-to-end marketing capabilities for CMOs by investing to scale intelligent marketing operations. This capability, which is part of Accenture operations, combines platforms, analytics, and artificial intelligence to run marketing campaigns as a seamless managed service. Second, Accenture Industry X.0 focuses on the digital reinvention of manufacturing and production, helping clients create smart, connected products and services, using advanced technologies including the Internet of Things, connected devices, and digital platform. A great example is that we are partnering with Schneider Electric to create a Digital Services Factory to build and scale new services in predictive maintenance, asset monitoring, and energy optimization. By combining real-time analytics with collected technologies on an IoT platform, we are helping anticipate customer needs and reducing the time to launch new services at scale by 80%. And to give our clients hands-on experience, we are opening industrial IoT innovation centers, including one near Munich, where we’re working with clients to design and prototype digital solutions that will improve engineering, manufacturing, and production. We plan to open new centers soon in the U.S. and Asia. The third area, Accenture Applied Intelligence brings together the capability to build advanced analytics and artificial intelligence. Increasingly, we are embedding artificial intelligence into the core of our clients’ businesses across every function and process. And given our technology independence, Accenture holds a unique position in the tech ecosystem. We are working with all the leading providers of artificial intelligence technologies including Microsoft, SAP, Google, and Amazon to bring the best solutions to our clients. We are working with a leading European insurance company to use analytics and artificial intelligence to understand what their customers want and deliver a personalized experience. Our solution across marketing, claims processing, and customer service is enhancing customer loyalty and making a significant bottom-line impact. We also continue to invest in this area with our acquisition of Search Technologies to expand our expertise in big data and enterprise search and our investment in Pactera, which helps companies generate value from data more quickly. Of course, we continue to work with clients on their largest and most complex transformation programs, delivering services end-to-end across our five businesses to drive business outcomes. With Marriott International, we are working at the heart of one of their most important business imperatives, the integration of Starwood, including the massive data migration. We’re also leveraging key elements of our innovation architecture to help Marriott achieve its goal to enhance the travel experience and accelerate growth. And today, we are very proud to be a flagship innovation partner for Marriott. Turning to the geographic dimension of our business, I am very pleased that we delivered strong revenue growth in all three of our geographic regions. In North America, we delivered 7% growth in local currency, driven by the United States. In Europe, we had another excellent quarter with growth of 11% in local currency, driven by strong double-digit growth in Germany, France, and Italy as well as high single-digit growth in Spain. And I am extremely pleased with our development in growth markets where we delivered 16% growth in local currency, led once again by very strong double-digit growth in Japan as well as double-digit growth in Australia, Singapore, and Brazil. Before I turn it back to David, I want to mention that the digital capabilities we’ve built along with our highly differentiated talent in the new are absolutely key to the successful execution of our strategy. That is why I am pleased we continue to receive recognition by industry analysts in key areas, ranging from the strength of our execution capabilities in digital strategy and consulting to our digital experience services in design, content, and co-innovation, and for our overall market leadership in digital services. I am also pleased Accenture was recognized by Fortune as a company changing the world and by JUST Capital for our leadership in environmental sustainability and in the training and development of our people. I truly believe Accenture is a magnet for top talent in the new, not only because of the work we do for clients but because our culture supports employees who want to make a difference in the community where we live and work. So, 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 second quarter of fiscal 2018, we expect revenues to be in the range of $9.15 billion to $9.4 billion. This assumes the impact of foreign exchange will be about positive 4.5% compared to the second quarter of fiscal 2017 and reflects an estimated 6% to 9% growth in local currency. For the full fiscal year 2018, based upon how the rates have been trending over the last few weeks, we now assume the impact of foreign exchange on our results in U.S. dollars will be positive 2.5% compared to fiscal 2017. For the full fiscal 2018, we now expect our net revenues to be in the range of 6% to 8% growth in local currency over fiscal 2017. For operating margin, we continue to expect fiscal 2018 to be 14.9% to 15.1%, a 10 to 30 basis-point expansion over adjusted fiscal 2017 results. We now expect our annual effective tax rate to be in the range of 22% to 24%. This range does not include the impact from the U.S. tax legislation. Before I move on, let me add some additional comments on our view of the new tax legislation. Our current assessment is that we do expect to record a non-cash expense in fiscal 2018 which could be up to $500 million to reflect the impact of lower tax rates on our U.S. deferred tax assets. Beyond this expense, we expect the impact to our fiscal 2018 tax rate to be minimal. For earnings per share, adjusting for the updated net revenues, foreign exchange and tax assumptions, we now expect full year diluted EPS for fiscal 2018 to be in the range of $6.48 to $6.66 or 10% to 13% growth over adjusted fiscal 2017 results. For the full fiscal 2018, we continue to expect operating cash flow to be in the range of $5 billion to $5.3 billion, property and equipment additions to be approximately $600 million, and free cash flow to be in the range of $4.4 billion to $4.7 billion. Finally, we continue to expect to return at least $4.3 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by about 1% as we remain committed to returning a substantial portion of our cash to our shareholders. With that said, let’s open it up so that we can take your questions. Angie?

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

Good morning to you. Very strong results here. I guess I’ll hone in on the consulting book-to-bill metric; like you said, it’s the highest you’ve seen. Wouldn’t that imply acceleration for the consulting segment here, in the short to mid-term? Maybe you can update us on that and just growth across consulting and outsourcing, and if that’s changed for the fiscal year?

Yes. I mean, let me start by saying that we are very, very pleased with our consulting bookings, obviously in the first quarter. We do see good momentum in the business. We’re pleased with our pipeline. And in fact, if you look at our bookings overall, we expect to have another strong bookings quarter in quarter two. So, if you look at momentum really, broadly across our business including consulting but not limited to consulting, we are very, very positive. Perhaps your question really was getting at therefore why didn’t we raise guidance further, perhaps? And on one hand, we have a lot of reasons to be optimistic. We clearly see momentum in our business, but on the other hand, it’s just one quarter in the books. And as we normally do, we want to have a little bit more visibility to the full year before we significantly change guidance. We feel obviously very comfortable. We’re taking the low end of the previous guided range off the table. And we will see where we end in quarter two. At that point, we will reevaluate the upper end of the range. But overall, very comfortable with our business and feel very good about the momentum.

Got it. That makes perfect sense. Just my quick follow-up, then I’ll just ask you obligatory question around acquisitions and the contribution to revenue or even bookings, if you have that in the quarter from acquisitions?

Okay. Thanks, Tien-Tsin. For the full year, our view of acquisitions hasn’t changed. We expect the revenue contribution, the inorganic to be in the 2.5 to 3% range. Now, that will be heavier or higher in the first half of the year where in the first half of the year, the impact is in the 3 to 3.5% range; and certainly, in the first quarter, let’s say it was probably more toward the upper end of that 3 to 3.5% range. And then, in the second half of the year, it will be lower in the 2 to 2.5% range. So, 2.5 to 3 for the full year, higher in H1, a little bit lower in H2. We continue to focus obviously on acquisitions as an essential part of our strategy. We did have a lower level of acquisitions in the first quarter. There is nothing you should read into that; it’s driven by market dynamics and the timing and kind of lumpiness of the way the pipeline evolves in acquisitions. We continue to focus on investing 1.1 to $1.4 billion this year, heavily focused on the new and acquiring critical capabilities to further support that part of our business, which is growing at such a high rate.

Hi, guys and happy holidays as well. Just looking at strategy and consulting. That was kind of a key segment that we saw last year kind of decline through the year and I think it was flat in the fourth quarter on a constant currency basis and then, it’s bounced back here to mid single digits. Also, I heard positive bookings comments about strategy and consulting. So, maybe you can just talk about a little bit on the turn here we’ve seen in strategy and consulting?

Yes. Let me make a comment or two, and then Pierre may want to add some comments or not, depending on what I say. So, first of all, let me just remind you. When we had this discussion last year, we noted for the group that all of our businesses are subject to going through ebbs and flows and cycles. We commented on the fact that in fiscal 2015 and 2016, we had consistent double-digit growth in consulting and strategy services combined. We mentioned last year that application services and operations were very hot. And we also talked about the fact that our strategy and consulting practitioners really play two roles. One role is to serve our clients and delivering strategy and consulting services specifically. But the other role is to really bring the full scope of Accenture services and offerings to the client. So, they have a dual role of both selling the full suite of Accenture’s capability to drive transformation, as well as, let’s say business-specific service. So, in that context, as we indicated, these parts of our business can go through kind of natural ebbs and flows. We’re at a point in time now where if you look at the transformation that a lot of industries just continue to go through, if you look at the high level of growth in the new, we’re at a point where the convergence, the factors were such that the demand for those services, which is higher in quarter one, it was fairly broad-based and it was heavily focused on the new. In fact, the growth rate for consulting and strategy in the new was much higher than the average growth rate of mid-single-digits that I commented on. Pierre, let me just see if there is anything you’d want to add to that.

Yes, sure. Complementing just what you said, I clearly see three main drivers for strategy and consulting growth. I think of course the number one is pretty obvious is there is a strong and stronger demand around digital strategies and digital transformations in all industries and across the world. And number two, there is still the same appetite today for rationalization. You know what is this around the evolution of the industries; digitalization is on one hand, rationalization on the other hand. In terms of rationalization as administration, we have great success with our, what we call, BBZ, budget base zero kind of approach, which is all about rationalizing operations and cost to make our clients more effective. And three, it is a clear rebound in what I would call the platform business. And by platform, I’m thinking about SAP, I’m thinking about Microsoft, I’m thinking about Salesforce.com as an illustration. Clearly, their new platforms, cloud-enabled are creating demand for our technology services, but as well are driving demand for consulting services, because you have to significantly transform the organization as well as the processes.

Just one quick follow-up. When thinking about the 10% constant currency revenue growth rate, I know that’s up from 8% constant currency last quarter. Just trying to think about the two big dimensions. Did the new growth portion accelerate that cause that acceleration or did just the core growth business improve? Thanks so much.

The primary driver of our growth in the quarter continues to be the new. So, the big story continues to be underpinning that 10% is just very, very strong growth in the new.

Can you comment on what the underlying growth rate looks like in overall IT budgets as you approach the end of the calendar year and discuss 2018 with clients? We often talk about the shift to new technology, but I'm interested in the dynamics of overall growth. I mention this because in our recent CIO surveys, we've observed a noticeable increase in overall budget growth. Are you seeing a similar trend as you look toward 2018?

Thank you, Lisa, for your question. I have reviewed the report you shared regarding your CIO survey, and I can confirm that there is indeed an increase in the budget. However, as you noted, investments are continuing to transition from legacy systems to newer technologies. The demand within the legacy segment is focused on optimizing applications and infrastructure, which is creating solid demand for our cloud services and positive results in our application outsourcing business. We are also witnessing a significant shift in the budget towards digital technologies, both within IT and marketing. This trend is growing, especially as we move from what I consider the recent years' focus on proof-of-concept prototypes to the actual deployment of digital capabilities. This shift is generating substantial demand for Accenture's services, as we are well-positioned to support the industrialization of digital services.

Thank you, David. Could you provide some insight into the free cash flow numbers? I've observed that free cash flow is slightly down compared to last year and last quarter. Additionally, your guidance for the year shows no year-on-year growth at the midpoint, even with a robust earnings growth outlook.

Yes. I mean, as I said, I don’t think there’s anything particular to point out on our free cash flow guidance. The first quarter played out pretty much exactly as we had expected. It’s typical that we have an uptick in DSO in the first quarter from the fourth quarter, and that played out as expected in the range that we had expected. And we continue to track well for our free cash flow for the full year. Again, one of the things that you know Lisa we comment on is the relationship between free cash flow and net income. And our free cash flow range continues to indicate that we have a model where the free cash flow exceeds our net income. So, we feel very good about it. I mean, we work hard every day on DSOs and other aspects of our cash flow to try to land as high in the range as possible. But, we feel good about the range that we started here with and reconfirmed just few minutes ago.

Yes, thanks. Good morning. Can we talk a bit about digital, cloud, and platforms? I’m assuming it’s north of 50% of revenues. Maybe some color in that. And you did indicate double-digit growth, maybe some more color on that. Is growth accelerating or are we still at the same level that we’ve seen a year maybe two years ago? Thanks.

Yes. I’m very pleased to comment on this. I mean, first, what we’re calling the new digital, cloud, and security services; you added platforms, I’m fine with that. We see continued momentum in the services we have built these last few years, interactive, what we call mobility, analytics, cloud, and security. This is very strong and we continue to enjoy good growth. But, in addition, we don’t stand still. And this is what I wanted to communicate, especially in this call to all of you is the new ways of digital technologies and innovations are coming extremely rapidly. And so, what we wanted to make sure we stay ahead of the curve and so we could provide to our clients at scale, the services in these new technologies, and that’s why we are launching these three new services that are going to join Accenture Digital. I’m thinking about Accenture Applied Intelligence, so bringing the artificial intelligence and machine learning on top of our existing analytics business. So, the analytics business had a good momentum, and we are adding artificial intelligence and machine learning to accelerate this momentum and accelerate growth. We’re doing a very similar thing by the creation of Accenture Industry X.0 where we’re bringing the new capabilities we’ve developed in terms of engineering, production on the internet manufacturing, if you will, around the digital manufacturing platforms and all the IoT and connected devices world to again sustain and accelerate our momentum in that space. And the last one is around what we’re calling intelligent marketing campaign in Accenture Interactive. Again, Accenture Interactive has an excellent momentum as we speak in the existing services, mainly design, content production, and commerce production as well. And we are adding intelligent marketing operations. So, we are adding on top of the good momentum an accelerator, if you will with the new capabilities we are launching. So, I’m very comfortable that we will continue to drive excellent double-digit growth in this part of our business.

Let me just share some insights on the quantitative aspect. Our revenues from new services now account for about 55% of our total revenue. Pierre and I discussed how this trend is widespread throughout our business. Across every industry and geographic market, we see a significant shift towards new services, generally in the range of 50% or more, with an overall figure at 55%. This is crucial for multiple reasons, particularly because it strengthens a key component of our strategy: fostering durability and resilience in our revenue streams. This serves as a clear example of how our business model is effectively achieving that goal.

Thanks. And just as a follow-up to this. Our surveys are talking about the fact or indicating the fact that average project sizes in this area are starting to pretty much scale and increase significantly, just given the fact that we’re getting to a point where you are saying your typical enterprise buyer kind of connecting the front end to the back end legacy backbone systems. Are you seeing that as well? And obviously, from your perspective that could be kind of a multi-year phase as well.

No doubt the digital projects are getting bigger and they are getting bigger, just consistent with the transition, as mentioned before. We had this space where clients were investing in smaller projects that qualified in terms of prototyping or proof-of-concept type of projects, testing the thing. Now, we’ve passed that phase where we have evidence that the digital transformation is driving growth and value for the different industries and clients are shifting to industrialize the digital capabilities. You’ve seen more and more the creation of what we’re calling or clients are calling digital factories, digital hub. That’s exactly what we’re doing with Schneider Electric, illustrated a few minutes ago. So, the projects are getting bigger in average as digital technologies are maturing and are scaling. So, it’s a very good trend. And of course, it is supporting double-digit growth in digital-related services.

I’m doing well, thank you. I would like to discuss the strong growth we've seen and briefly touch on the margins. Your operating margin was consistent with the same quarter last year. However, there are several factors influencing that margin, especially since you’re reporting a gap margin and absorbing all the costs related to acquisitions. Could you outline the key elements affecting your margin trend when comparing this year to last year? Additionally, I would like to know if there are specific underlying factors that pose significant challenges year-over-year and if there are any that serve as notable advantages.

Okay, great question. First, our operating margin can fluctuate from quarter to quarter, which is typical for our business due to various reasons. I want to emphasize that regardless of our margin in the first quarter, which we were pleased with, we are confident that we are on track to achieve 10 to 30 basis points of expansion for the entire year while also meeting our management objective to invest at significantly higher levels than our revenue growth, backed by genuine underlying margin expansion. Regarding the first quarter, I want to highlight a couple of points, none of which are surprising given our usual business flow. Firstly, the first quarter of last year was exceptionally strong for us, with 40 basis points of expansion reported. Therefore, when comparing our first quarter results, we are up against a very robust performance from last year. Additionally, we had a very high level of investment expenses reflected in our P&L in the first quarter, which aligns with expectations, particularly considering the $1.7 billion in acquisitions we made last year. Generally, our investments tend to be higher in the first half of the year compared to the second half. Another point to note is that some of our operating groups reported lower profitability on consulting contracts; however, we know that profitability can vary at different times, and we expect it to improve as the year progresses. Overall, we maintained a consistent level of high profitability comparable to last year’s first quarter, while the growth in our investments was much greater than the growth in revenue.

On a somewhat related note, I want to ask about your trend in your sole-source business. In our research, we’re seeing some reasons for sole-source activity to increase, but some other factors that could put some pressure on that. So, I’d love to know, when you net all the trends together, what’s the net impact on sole-source signings activity kind of on a weighted average basis across your business? So, can you say where your sole-source percentage is now and whether it’s heading up or down?

Yes, we track this every quarter, and we have a remarkable level of consistency in the sole-source deals as a percentage of the total. It continues to run around 70%. So, Rod, we haven’t observed a significant change in that pattern. Pierre, do you want to add something?

Yes. I’m going to give some color on this, because it’s giving me the opportunity to give you an information we didn’t match in the script. When you talk about sole-source, I think it does relate to the quality and the deepness of the trusted relationships we have developed with our clients over many, many years. And I’m very pleased to share with all this group that we have now 169 diamond clients. I am mentioning this number because many of you know how important are these diamond clients in Accenture’s strategy including in the economic model. It’s a record high of diamond clients at Accenture, 169, including the best brands across all the world, and the deepness and kind of relationship we’ve been developing for many, many years are as well driving these sole-source projects, because sole-source projects are directly correlated to the trust and the confidence our clients are putting in Accenture.

Good morning. So, I just wanted to start with a question on digital, which obviously is the biggest part of the new. We have estimated that the Interactive business might be upwards of maybe half of digital. So, any commentary around that? And just a general update on the growth trajectory of Interactive and the competitive positioning you see there versus the digital and the traditional ad agencies as the lines continue to blur there? I would love to hear about that.

I am very happy to discuss Accenture Interactive, which I consider one of our standout areas. I want to acknowledge Brian Whipple for his outstanding leadership in this segment. Accenture Interactive has been thriving recently, and for two consecutive years, we have been recognized by Advertising Age as the top company in digital marketing in terms of size and growth. We are experiencing incredible momentum. I was excited to share in my presentation that we are now the agency of record for Maserati, highlighting our status as a significant player in the agency landscape. We are capturing considerable market share and establishing ourselves as a leader in digital marketing solutions. Accenture Interactive has three main areas: digital design, digital content production, and commerce with e-commerce solutions, thanks to our previous acquisition of avVenta. We also made a successful acquisition of Acquity in the U.S. and Altima in France, which will strengthen our digital equity business. Additionally, we are launching intelligent marketing campaigns that will incorporate analytics and artificial intelligence, adding a new growth engine for Accenture Interactive. I am very confident that we will continue to expand our market share and achieve significant growth with Accenture Interactive. I am also excited to announce that Nikki Mendonça, a well-known leader in the industry, will be joining us soon to lead our intelligent marketing campaigns.

Okay, terrific. So, Accenture along with pretty much everyone else in the space is seeing this real bifurcation in growth between the new versus the legacy service offerings. And I am just wondering if you guys think that that may lead to some acceleration in industry consolidation, perhaps including larger deals and not just tuck-ins that have been more of the norm across the industry in recent years?

That’s a great question. Let me address this on David's behalf, as he has a strong perspective on the matter. He often reminds me that major transactions in professional services have a 100% failure rate, which is quite alarming. Will we experience that? I'm not sure. That's not our focus at Accenture. Our objective is to achieve organic growth by acquiring specific companies with unique and differentiated capabilities. What Accenture provides to these acquired companies is our exclusive access to top global brands and our expansive geographic presence; that's the combination we offer. When these companies join Accenture, they gain access to 169 high-profile clients, which are among the best brands worldwide. Therefore, I have confidence in David’s insights.

Good morning, and thank you for joining the call. Happy holidays to everyone. There's a lot of discussion about the new developments that are certainly noteworthy. I wanted to follow up on a question that Bryan asked. We've observed some better-than-expected results lately from traditional on-premise hardware vendors, which is fueling the discussion around the on-premise workflow computing environment and the current trends in that area. Are you noticing stabilization in the core, particularly with legacy contracts, or do you have any insights into what's happening there? Alternatively, do you think this might be an anomaly in the market?

What I can share with you is our perspective on the market for this platform. As you know, we are collaborating with all the major players in the ecosystem, including SAP, Microsoft, Salesforce.com, and Workday, to name a few. If you consider the legacy players, particularly SAP and Oracle, there were periods where they faced a transition from on-premise platforms to cloud-enabled solutions. Recently, they have made significant advancements. For instance, SAP launched S/4HANA, along with HANA's in-memory analytics tools, and are now integrating Leonardo, which introduces more intelligence and artificial intelligence. All of this is now cloud-enabled, and as you heard about the partnership between SAP and Azure to offer SAP solutions on the cloud, our services on these platforms are seeing substantial growth. Therefore, I no longer believe in classifying them as legacy players. They have successfully transitioned and can now compete in the cloud ERP space alongside Salesforce.com and Workday. I am very impressed with the progress they are making in shifting from on-premise legacy systems to cloud-based services.

Kevin, we have time for one more question and then Pierre will wrap up the call.

David, sorry if I missed this, but I think you mentioned the tax reform had minimal impact on fiscal 2018 EPS. Can you provide us with any parameters that may help us understand the potential impacts of tax reform beyond this fiscal year?

Yes. So, just to I guess to reconfirm, to ensure I was clear in the remarks I made in the script. Again, we expect our tax rate this year to be in the 22 to 24% range. And that does not include the impact of the U.S. tax legislation. Again, our current assessment is that the impact on the effective tax rate will be minimal, other than a non-cash expense for fiscal 2018, which could be up to $500 million which reflects the impact of lower tax rates on our U.S. deferred tax assets. I didn’t say it in the script but let me also add that we do not expect an impact on our tax cash payments this year. So, having said that, over time, on an ongoing basis the legislation could modestly impact our ongoing effective tax rate by imposing taxes on our intercompany transactions and limiting our ability to deduct certain expenses. And so, the specific answer to your question beyond what I said about 2018 is that on an ongoing basis, we think it could modestly impact our ongoing effective tax rate. And essentially, you’ve got the lower rate, which is let’s say offset essentially or closely offset by the loss of certain deductions and then the other thing in the mix as well is the tax imposed on intercompany transactions. But, in the mix, we see a modest impact over time.

So, that’s the modest impact, plus or minus, is that up?

I would say more likely a modest upward pressure than downward.

Got it. Great. Thanks for that. Just a quick follow-up. You’ve effectively used acquisitions to enhance your ability to achieve scale in the marketplace. Given the slower pace of acquisitions this year, can we assume that your recruiting and training infrastructure is now sufficient to meet market demand, or are there other factors to consider?

I understand that if you look at the numbers, you might conclude that we have a lower rate of acquisitions. However, I would argue that our estimate of 1.1 to 1.4 this year aligns perfectly with our strategic objective. Last year, the market presented opportunities that allowed us to exceed our typical strategic range. That could very well happen again in the future. Therefore, it's not a slowdown compared to last year; rather, it was just above our usual range. This year, we're guiding for 1.1 to 1.4, which aligns with our strategic goals, and we will see how the year unfolds.

All right. I think it’s time, right Angie, to wrap up the call. Thanks again for joining us on today’s call. So, in closing and with the first quarter now behind us, as you probably heard from David and me, we feel very good about where we are. And I’m personally confident that we are well-positioned to continue gaining market share, driving profitable growth, and delivering value for both our clients and all our stakeholders. I want to wish you, our investors and analysts and everyone at Accenture a very happy holiday season and all the best for the New Year. We look forward to talking with you again next quarter. In the meantime, if you have any questions, as always, please feel free to call Angie and the team. All the best. Happy New Year. Talk to you next year.