Accenture F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

Accenture Ltd. (ACN)

F1Q08 (Qtr End 11/30/07) Earnings Call

December 19, 2007 4:30 pm ET

Executives

Richard Clark - MD of IR

Bill Green - Chairman and CEO

Pam Craig - CFO

Steve Rohleder - COO

Analysts

Andrew Steinerman - Bear Stearns

Rod Bourgeois - Bernstein

Adam Frisch - UBS

Julio Quinteros - Goldman Sachs

Moshe Katri - Cowen and Company

Bryan Keane - Credit Suisse

Tien-Tsin Huang - JP Morgan

Julie Santoriello - Morgan Stanley

Pat Burton - Citi

Elizabeth Berkley - Arete Research

Tim Fox - Deutsche Bank

Presentation

Operator

Welcome to Accenture's first quarter fiscal year 2008 conference call. (Operator Instructions)

I would now like to turn the conference over to your host, Managing Director of Investor Relations, Mr. Richard Clark. Please go ahead.

Richard Clark

Thank you, operator, and thanks everyone for joining us today on our first quarter fiscal 2008 earnings announcement. As the operator just mentioned, I'm Richard Clark, Managing Director of Investor Relations. With me this afternoon are Bill Green, our Chairman and Chief Executive Officer; Pamela Craig, our Chief Financial Officer; and Steve Rohleder, our Chief Operating 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. Bill will begin with an overview of our results. Pam will take you through the financial details, including the income statement and balance sheet, and Steve will add some operational perspective. Pam will then provide our business outlook for fiscal year 2008, and Bill will close the presentation before we take questions.

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 are forward-looking, and you should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, general economic conditions and those factors set forth in today's press release and discussed under the Risk Factors section of our Annual Report on Form 10-K and other SEC filings. Accenture assumes no obligation to update the information presented on this conference call.

During our call today we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. You can find reconciliations of those measures to GAAP on the Investor Relations section of our website, at accenture.com.

So now, let me turn the call over to Bill.

Bill Green

Thank you, Richard, and thanks everyone for joining us today. We turned in another outstanding performance in the quarter as we expected. We have built a strong foundation for our business that continues to serve us well. We have a great momentum going into the start of the year.

We have a highly diversified and durable yet flexible business, and we are positioned at the core of our clients needs for high performance. We are driving our business with discipline and confidence, and are focused on the excellent opportunities we see before us.

Here are some of the highlights from the quarter. We delivered record quarterly revenues of $5.7 billion with 19% growth in the US dollars and 12% growth in local currency. We achieved record EPS for the quarter of $0.60.

Our $5.9 billion in new bookings this quarter was another major achievement. We remain confident going forward with our bookings momentum and our revenue targets.

As you know, we continued returning cash to shareholders through share buybacks and dividend payments. During the quarter, our Board also authorized an additional $3 billion of share repurchases.

We continue to keep a very close eye on global economic trends, developments in the capital markets, and other issues which may affect our business. But our first quarter results demonstrate rich opportunities for the right services. We remain committed to and excited about extending our industry leadership position.

We also continue to benefit from our long-term client relationships and our position as a central part of our clients businesses. Our deep specialized industry knowledge and experience and our focus on business outcomes stand alone in today's market.

Now, I'll turn it over to Pam who will provide more detail on our financial performance.

Pam Craig

Thank you, Bill. Happy Holidays to you all and thanks for listening today. I am pleased to tell you more about our outstanding results in the first quarter of fiscal 2008. Once again, our quarterly revenues hit a new high, our earnings were strong and our bookings were in line with our outlook.

Let me take you through some detail behind the numbers in our income statement, balance sheet and cash flow. All figures are GAAP, except the items that are not part of the financial statements or that are calculations.

Net revenues for the first quarter were $5.7 billion above our guided range of $5.4 billion to $5.6 billion and a new quarterly high. Net revenues increased 19% in US dollars and 12% in local currency over the first quarter of last year. We had very strong revenue generation, and even without the large FX impact for the quarter, we were at the top of our guided annual range of 9% to 12% in local currency.

Consulting revenues were $3.5 billion, an increase of 19% in US dollars and 12% in local currency. Outsourcing revenues were $2.2 billion, an increase of 20% in US dollars and 14% in local currency.

Moving down the income statement. Gross margin was 30.1% consistent with the same period last year. SG&A costs for the quarter were $970 million or 17.1% of net revenues compared with $817 million or 17.2% of net revenues for the first quarter of last year, reflecting continued good management of our SG&A costs.

Operating income for the quarter increased 19% to $726 million, reflecting a 12.8% operating margin, up from $610 million, also reflecting a 12.8% operating margin last year.

Our effective tax rate for the quarter was 34.6%. Income before minority interest for the quarter was $506 million compared with $406 million for the first quarter last year, an increase of 25%.

Diluted EPS were a quarterly record of $0.60, an increase of 30% over diluted EPS of $0.46 in the first quarter last year. About two-thirds of this increase is attributable to higher business volume. The rest is due to a combination of additional below the operating income line income, a lower tax rate and a lower share count.

Now, let's turn to some key parts of our cash flow and balance sheet. Free cash flow for the quarter was a negative $120 million, resulting from cash used in operating activities of $31 million and property and equipment additions of $89 million.

The first quarter is typically our seasonally lowest free cash quarter. This quarter was further impacted by a payment of $143 million, representing a final determination of reorganization liabilities. As a reminder, at the time of our incorporation, we established these reorganization liabilities. And after this item, $294 million remains primarily in other current liabilities on our balance sheet. This item had no impact on our quarterly income statement.

First quarter fiscal '08 free cash flow also reflects higher working capital as a result of higher revenue production and the impact of DSO movement.

Turning to DSOs, our day services outstanding were 37 days. This represents an increase of 6 days from the fourth quarter last year. As we stated last quarter, the yearend level of 31 days was unusually low, and we believe that a DSO level that continues to be in the 30s is strong.

Our total cash balance at November 30th was $2.47 billion compared with $3.31 billion at August 31st. Cash, combined with $205 million of fixed-income securities, classified as investments on our balance sheet, was $2.68 billion at November 30th compared with $3.61 billion at August 31st. We continue to return cash to shareholders through dividend payments and share repurchase, which I will describe in more detail momentarily.

Total debt at November 30th was $8 million compared with $26 million at August 31st.

In connection with the adoption of FIN 48, new guidance related to accounting for uncertain income tax position, we recorded several balance sheet reclassifications. The most significant was a $757 million reclass from current income taxes payable to non-current income taxes payable, as the new guidance requires us to record these balances in non-current liabilities unless we are certain that the amounts will settle in less than 12 months.

There was also a $16 million adjustment to retained earnings related to differences in calculating tax reserves under the new guidance.

Our balance sheet metrics remain strong for the first quarter. Our return on invested capital was 67%. Our return on equity was 71%. And our return on assets was 18%.

Before I turn things over to Steve, I will comment on share repurchases and dividend activity. During the quarter, we repurchased or redeemed 16.3 million shares for $619 million, including $238 million for approximately 6.7 million shares repurchased in the open market. The average price of shares repurchased and redeemed in the quarter was $37.98 a share. At November 30th, we had $4.1 billion of share repurchase authority remaining.

Also, last month we paid our third annual cash dividend to Accenture Limited Class A and Accenture SCA Class I common shareholders. The dividend payment of $0.42 per share was $0.07 more than the dividend we paid last year, representing an increase of 20%.

Finally, let me comment on the size of our public float. Using what we believe to be the most conservative method of calculation, our public float at the end of the quarter was approximately 67%, which excludes all outstanding founder shares. All in all, it was a great quarter any way you look at it.

Now Steve will give you some more detail on our operations.

Steve Rohleder

Thank you, Pam. Hi, everyone, and thanks for joining us today.

We're up to a strong start in FY '08 with record revenues for the quarter and solid growth across all dimensions of our business. We continue to make progress and implementing our strategy, and we are focused on achieving profitable growth in every aspect of our operations. We're very proud of our first quarter results, including the progress we've made in expanding our business during the quarter.

Let me take you through some of the highlights, starting with our operating groups. All five operating groups recorded their highest-ever quarterly revenues with products, resources and CHT, exceeding 20% revenue growth in US dollars and achieving double-digit growth in local currency.

I know many of you are interested in financial services, so I'll point out that revenues and financial services grew 17% in US dollars and 9% in local currency in the quarter, driven by outsourcing in EMEA and the Americas. Financial services, products and resources also delivered strong operating margin, while CHT operating margin was affected by one consulting contract with profitability challenges in the quarter.

A key highlight of the quarter is the investment we're making in expanding our industry skills and offerings. A great example is in public service, where we're adding new capabilities for defense clients through the acquisitions of Gestalt and MAXIM Systems. These acquisitions give us new and distinctive capabilities in the fast growing area of military command and control support services, which represents a significant new business opportunity for us.

Turning to the geographic regions, the diversity of our business is a competitive advantage and was an important driver of our performance in the quarter. We're executing on our strategy of gaining market share in developed countries and expanding into new and emerging markets.

In the Americas, revenues grew 11% in US dollars and 9% in local currency. Results were driven by growth in the United States and Canada. And in Latin America, four of our six key countries had exceptionally strong growth, including Brazil and Argentina.

In EMEA revenues increased 25% in US dollars and 14% in local currency with continued upturn in the UK and double-digit growth in France, Italy, Spain and the Netherlands.

Revenue growth in Asia Pacific was exceptional, with an increase of 29% in US dollars and 21% in local currency, driven by strong results in Japan, Australia, Singapore and China. We've set out to expand our business in emerging markets, and in Q1 we delivered strong results against this objective.

Turning to the growth platforms, the depth and breadth of skills and capabilities we offer clients really sets us apart in this marketplace. In management consulting, we saw strong demand across all five service lines, most notably in human performance where we're helping clients transform their workforces, source new talent and increase overall productivity.

We also expanded our capabilities in management consulting. I was in India a few weeks ago to open up a new management consulting centre of excellence in Delhi. Through this centre, and three others that we plan to open in India, which will serve both our global clients and our domestic business, we'll deliver a wide range of services such as data analytics, workforce optimization and supply chain strategies.

In outsourcing, we're seeing demand for application outsourcing as well as BPO. Growth is being driven by demand for finance and accounting, learning and procurement services. And we've also expanded our vertical industry BPO offerings in health administration and in pharmaceuticals.

In systems integration and technology, we're still seeing strong demand for ERP, and the breadth and depth of our SAP and Oracle skills is a major advantage for us. Our technology consulting business continues to grow in double-digits with strong demand for Microsoft Technology Services.

We expanded our technology consulting capabilities through the acquisition of Corliant. This acquisition will help us deliver against the growing demand for network consulting services, including advanced IP network solutions, which represent a high growth opportunity for our business.

We also continue to invest in the expansion of our global delivery network, ending the quarter with more than 75,000 people, a 41% increase over Q1 last year. While GDN headcount was strong in Asia Pacific, especially in India and the Philippines, we also expanded our capabilities by adding new talent in the Americas and EMEA. Our global delivery network is in a class by itself and continues to be a major competitive advantage for us.

Finally, let me turn to a few operational metrics. Bookings were $5.9 billion, including consulting bookings of $3.4 billion and outsourcing bookings of $2.5 billion. Our solid new bookings reinforce our confidence in our ability to drive revenue growth in FY '08.

Turning to people management, we continue to recruit aggressively, ending the quarter with over 175,000 employees. Utilization was 83%, in line with our expectations, and attrition improved slightly to 17%.

Managing supply and demand is one of my top priorities. By continuously tracking and carefully managing a number of levers, including utilization, attrition, recruiting and training, and then balancing them against market demand, we're able to maximize our operational performance.

In closing, we built a business model that is second to none with specialized capabilities across virtually every major industry sector and geography, as well as across a full range of management consulting, systems integrations and technology, and outsourcing services. As a result, we're well positioned to continue our growth trajectory throughout fiscal year '08.

And with that, let me turn it back to Pam for our business outlook.

Pam Craig

Thank you, Steve.

As a reminder, each quarter we provide an update on our annual outlook for the full fiscal year. We also provide outlook for the next quarter for revenues. For the second quarter, we expect revenues to be in the range of $5.5 billion to $5.7 billion, which assumes an FX lift of approximately 7%.

Now, let's turn to the full fiscal year. We continue to target new bookings in the range of $24 billion to $26 billion. We continue to expect our revenue growth to be in the range of 9% to 12% in local currency. We continue to expect operating margin for the full year to be in the range of 12.8% to 13.1%. Given the seasonality of our business, fluctuations, quarter-to-quarter should be expected.

We now expect our annual effective tax-rate to be in the range of 32% to 34%, a decrease of 1% from our previously communicated range. We are now increasing our outlook for EPS for the year by $0.15 to a range of $2.36 to $2.41. This reflects the strong results delivered in the first quarter and updated estimates including a lower annual effective tax-rate for the rest of the year.

To complete the annual outlook for fiscal 2008, we now expect operating cash flow to be in the range of $2.27 billion to $2.47 billion. Property and equipment additions to be $420 million and free cash flow to be in the range of $1.85 billion to $2.05 billion. This is a decrease of $150 million from our prior outlook and reflects the previously mentioned reorganization liability resolution, which arose in the first quarter.

In summary, our first quarter results reflect those of a healthy business on a path for continued growth and profitability. We have a portfolio that is broad based, across industry segments, across the different types of work we do and across all the geographies where we do business. We remain confident that we will continue to maintain and expand our strong presence in the markets we serve.

So here is Bill to close before we take your questions.

Bill Green

Thank you, Pam. Let me recap quickly before we take your questions. First of all, we're absolutely delighted with our performance in the first quarter and we continue to execute against our growth agenda. We achieved record quarterly revenues and EPS, our balance sheet remains extremely strong despite challenges in some sectors of the economy, demand for our services continues to be robust and we see tremendous opportunities to [insist] clients.

We continue to expand on our capabilities to differentiate Accenture from our competitors. And we sustain the momentum that we had developed in 2007 as we expected we would.

Now let's go ahead and open it up for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Andrew Steinerman with Bear Stearns. Please go ahead.

Andrew Steinerman - Bear Stearns

Hi there. Could you just give some comment about IT budget process? Is it coming along in a normal fashion? Obviously you are very clear that its ramping, your services are strong and obviously not solely depends on IT budgets, but: could you just us IT budget comment?

Bill Green

Yeah Andrew this is Bill. I would say: I have been out in the marketplace we are pretty much in the last month, out and this is the time that everyone is pulling those together. I think the first place we start as we look at what do people think is going to happen their business and I think unbalance people are pretty confident about what they see is going to happen in the business. And even in some of the areas that are challenged, people continue to invest broadly in their business. Now IT is a part of that, but there are a lot of other things people are doing to improve their business performance. So frankly we haven't seen any impact of IT budgeting on our business at this point.

Andrew Steinerman - Bear Stearns

And: Pam could you just go through a couple of puts and takes on gross margin year-over-year?

Pam Craig

Yes. As you, I'm so sorry Andrew that our gross margin of 30.1% was consistent with last year. This is a good result. First of all, as we stated previously, we did implement larger salary increases this year and got that covered in our pricing in the first quarter. And also utilization levels are slightly lower than we were last year and we think this is a more healthy level. So, these were the two primary things that we were addressing in the first quarter and you see that reflected in the margin. Now, I'm never going to give up, as I know you won't on gross margin. So, we are going to continue to look for the leverage in our pricing and in contract profitability.

Andrew Steinerman - Bear Stearns

It sounds great. Thanks so much.

Operator

And our next question is from Rod Bourgeois with Bernstein. Please go ahead.

Rod Bourgeois - Bernstein

Great, just to look at the demand environment, just two sets of questions on thing that might be reading indicators. Are you seeing any evidence of above normal levels of deals getting cut midstream as company struggle with the economy that's our there? And then also: are you seeing any new deals that are getting pushed out in the pipeline due to the economic distractions that might be out there?

Bill Green

Rod, this is Bill. We've spent a lot of time, I mean: a lot of “rigger”, on that over the last week or so. Just so we could be able to answer the obvious question that one of your folks was going to ask. The fact is, we haven't had any deals terminated because of the economic situation and we've had nothing pushed out because of the economic situation. When you stand back and look at it, if you look at the United States business, which again is dramatically less than half of our business.

70% of the US companies in the business round table expect pretty significant increases in sales and almost 80% of those companies think and expect their employment to rise, that's for 2008 and so that's one thing we look at, in terms of what's going on out there. I would tell you this, as it relates to they are, some of the industries that are challenged, there are some clients that are coming to us for services that address short-term cost improvement. So, it caused some acceleration in some of our offerings that may have been more modestly pursued in the last few years, but that is the only thing that we've seen different given the current economic situation as it stands today.

Rod Bourgeois - Bernstein

Okay great. And then Pam on the $0.15 of increase in your fiscal '08 EPS guidance: can you give us the puts and takes on that $0.15 increase, just so they were precise on where that $0.15 is coming from?

Pam Craig

Yeah, I mean, you can think of it this way, Rod. Roughly a third of it, is from the first quarter and the good results in the first quarter and I broke down some of that before that which is primarily from operations, but also that there was a gain in the below the operating income line item and so, I think that flow through. In term of looking at it for the rest of the year, it's a combination of operations, of a lower annual effective tax rate and an updated estimate on share account.

Rod Bourgeois - Bernstein

Okay, great. Thank you guys very much.

Operator

And then we'll go to the line of Adam Frisch with UBS. Please go ahead.

Adam Frisch - UBS

Thanks guys. Great quarter and you faced some pretty high concern there. When I look at outsourcing bookings over the last years, it’s been okay, they haven't been stellar maybe one quarter a couple of years ago, they were great, but for the most part they have been okay, nothing like consulting strength. The growth has been a lot higher. Great result, but what is it due to? Is it due to expansion of the contracts once you get in there or what? And: how sustainable is that kind of trend?

Steve Rohleder

Yeah. Adam, it's Steve. I think it is a result of a number of extensions that we experienced in some of our foundation in diamond clients. And so, I think that's just a result of us expanding our footprint in the outsourcing world within the clients' environment.

There are a number of deals in our pipeline as well that I think support the guidance that Pam has put out there. So, in spite of some of the doom and gloom that's been put out in the outsourcing world, there are still a significant number of opportunities. Frankly, we're being a little bit more selective in specific areas of outsourcing when it comes to going after some of these deals.

So, there is no shortage of opportunities out there. We are going to continue to be selective about the ones we go after.

Adam Frisch - UBS

And the expansion of deals that you're already working on: do you include those in your bookings?

Steve Rohleder

Yes.

Adam Frisch - UBS

They are included. Okay.

Steve Rohleder

Yes.

Adam Frisch - UBS

And: those were obviously higher margin, because they have lower sales costs already in there?

Steve Rohleder

Yes.

Adam Frisch - UBS

Most of them would be higher on the margin side too.

Steve Rohleder

Yeah. Depending on whether it's a new area or an extension of an existing area.

Adam Frisch - UBS

Okay.

Steve Rohleder

It depends.

Adam Frisch - UBS

Okay. Two questions for Pam. First: what share count are you assuming for the end of the year?

Pam Craig

We're projecting, Adam, that it will continue to go down modestly.

Adam Frisch - UBS

Anything, anymore color than that?

Pam Craig

Well, we have not previously provided guidance on our weighted average share. They were at 839 at the end of the quarter. And, as I said, it will continue to go down modestly with share buybacks, and also that will be slightly offset by the issuances.

Adam Frisch - UBS

Got it. Okay. And then just last question on, I know you did a couple of acquisitions recently, I know they've been small. But: did they add anything material to the revenue or EPS as such?

Pam Craig

No.

Adam Frisch - UBS

No. Okay. Great! Thanks again, guys. Good quarter.

Bill Green

Thanks, Adam.

Operator

Thank you. And we'll go to the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Julio Quinteros - Goldman Sachs

Thanks, guys. Steve, just to kind of go back through the points that you made about the areas that you're really focused on to kind of continue to sort of balance supply/demand and all the other issues in the model. If you can kind of walk us through where you feel like you have the most leverage, whether it's utilization, whether it's recruiting, whether it's headcount, just kind of give us a better feel for the individual levers that you look at to, to help you manage the overall business?

Steve Rohleder

Okay. Yeah, Julio. Let me actually expand it out of the supply/demand management area, because I think it's important to note some of the other levers that we're continuing to watch. Pam alluded to the pricing initiative that we got and the progress we made in Q1. We're going to continue to focus on that. We've made some very good progress. I think we've got some more work to do to continue to institutionalize that, put some tools in the hands of our senior executives, and really drive pricing into our D&A. That's one area.

SG&A is another area. I think that on the G&A front, I think we made some great progress in moving people to lower cost locations in our corporate functions. I think we also did a great job this quarter in terms of our consolidated procurement initiative in driving down costs there. Where we have some opportunity is to drive down our cost of sales. I think it's safe to say that we have some inefficiencies there that I think we can improve on. So, I think that there is some expansion there.

The third area is chargeability and you touched on it. I think that while we're running kind of at the target, last year we were at 86. And I said this I think we're running too high. We brought that down to allow our people to go to training, to allow them to work on some investment opportunities that we have. There are pockets of the firm that we are working to get the chargeability up a notch or too. But, while I think we will make progress there, I know we'll make progress there, I think the key is that you're not going to see much leverage from that.

And then, the final one is just delivering on what we say, we're going to deliver and making sure that our contracts are performing to the profitability targets that we have and I do believe that there is some expansion capability there. So, hopefully that helps.

Julio Quinteros - Goldman Sachs

Yeah, that's helpful. On that profit comment, you made some comment about the communications, and I think it was high-tech area, having some profitability issues, was that just cost overruns or is there something else going on there in terms of the profit impact?

Steve Rohleder

Yeah. No, it's just sort of a one-time thing that we did a realignment with one of our contracts. We continue the relationship with the client and we continue to be honored to work there and do well. But it was a big one and it was something we sorted through in the quarter.

Julio Quinteros - Goldman Sachs

Okay. And then, finally, Bill, you made a comment in the previous question, I believe, about an acceleration in some services that you're seeing now as some of your clients come to you for some issues related to short-term cost improvements. Can you just elaborate on what those types of services are?

Bill Green

Yeah. I would say I did, in the last four weeks, probably 20 CEO one-on-ones, mostly in the United States. And in every one of those sessions, there were opportunities to expand our work and deliver more value to the client. But some industries that are challenged, people that might have been taking a longer term view are sitting here at the beginning of 2008, and they are saying, I know we're going to do this transformation, that's a three year journey. But there is a thing called sort of the high impact near-term returns and people are saying, can we drive short-term cost reduction and use some of the benefits of that to fund the longer term transformation.

And so, I would say my comment was about, you see a little more of that in some areas of financial services as you'd expect. And then, other than that it's probably just with companies that have a challenge in one industry or another. But there's a time when the short-term cost reduction thing, if you think about the time of the year we're on, people are looking at 2008 and saying: what can you guys do? So I can bring some money to the bank in 2008, for their 2008. And I think that's where the demand comes from.

Julio Quinteros - Goldman Sachs

With 43% of your headcount in global delivery network now: does that make you feel better about having the business set up that way then?

Bill Green

Well, I'm relaxed about it. There hasn't been anything that comes up that we don't have the horses and the capability and the "been there, done that" experience to do. And so, I think, at the end of day its managing a portfolio of services across a fairly diverse company. But luckily, we're at critical mass in every country we operate around the globe. So, it's just a matter of different offerings than it would be anything else.

Julio Quinteros - Goldman Sachs

Great! Thank you.

Operator

And next, we'll go to the line of Moshe Katri with Cowen and Company. Please go ahead.

Moshe Katri - Cowen and Company

Thanks. Listening to the collage, it feels as if management is even, maybe, a bit more bullish compared to about a month ago when the Analyst Day took place. Is that the right impression? And then, maybe, you can talk about: what's changed during the past four, five weeks, in terms of talking to clients? And then, on top of that, our surveys are indicating that there maybe some deferrals and spending decisions more to the January, February timeframe and: can we also participate on that? Thanks.

Bill Green

Well, I mean: I guess, I just tell you. I don't know, when I'm bullish, I guess, I get in trouble. So, I try to be thoughtful about it. What I do make sure I do is: to have a handle on what the hell is going on in the business, right? And the only way to do that is with the big clients and that's why I have spent the last month out on the road, right? Taking people's temperatures, seeing: how and what people are focused on? What are they need to do? Is globalization still driving the competitive agenda? All the things that had been going on in the past.

And the fact is, they are, right? And everyday there are changes in the competitive dynamic and those changes create opportunities for Accenture. So, in one way, you can either let the business drive you or you can drive the business. I think what our leadership team has done is, knowing there are some uncertainties in the way the environment is made, so we took charge in that we are driving the business.

One of the things Steve talked about is: areas of expansion. He talked about an acquisition that built out more capability around the network, which is sizzling hot. He talked about a couple of acquisitions to get into the sea force space in the military stuff, again sizzling hot. We have an incredible presence there, but these gives us new products and services to bring to market and that's just start of the day job, and that's what we are doing. And so, frankly, we feel the firm is in good hands and we feel in good shape. And then all are soundings in the market globally, we feel good about the business.

Moshe Katri - Cowen and Company

And then finally, this is a question to Steve: may be talk a bit about your specialized sales force that actually is focusing on selling what we call: “offshore likes services”?

Steve Rohleder

Okay, in the basis AO area. We've been really pleased with the productivity of that group. Frankly, I wish I had about three times the size because I think the market is there and we're now looking at opportunities to expand that work force even more aggressively than we have in the past.

So, I'm pleased with the level of sales and bookings of that group has generated. We've limited the growth to the US and the UK. I'd like to expand it beyond there frankly. We got some plans on the table right now, to move more aggressively into Q2 and Q3 in that area. So overall, Moshe I'm really pleased with what we've done.

Moshe Katri - Cowen and Company

Great, congratulation for the quarter!

Steve Rohleder

Thank you.

Operator

Okay. And we go to the line of Bryan Keane with Credit Suisse. Please go ahead.

Bryan Keane - Credit Suisse

Yeah, hi thanks. Bill, when you say: “something mystery” or “challenge” and it's come at you first and short-term cost cutting. I just want to be clear: what industry is there that you're referring to there?

Bill Green

Well, I give you a couple of examples. If you are in obviously certain areas of banking, I look in what can we do achieve the short-term cost improvements. I mean, that's sort of like goes without saying and its something they do periodically and given the current environment that we're in right now. People are focused on that. You read about it everyday. Then you go to sort of the sectors, right? You, for instance, pharmaceuticals: If you look at the life cycles of pharmaceuticals companies, some of them have red hot drugs that are going in to market and some of the half things come off patent and then their challenge.

And so those companies are looking at strategic rationalization and then proven their cost position. So they could spend that money on R&D to get new products to market and so those are just two examples that actually come up in the last few weeks, where or what people look at, we are looking to us for, now these are long-term relationships. But what the companies are looking to us for now is: “help me with short-term cost improvement because I want to use that money for something else to drive my business”.

Bryan Keane - Credit Suisse

And then Steve: maybe you can just follow-up on financial services? You mentioned: obviously, people are concerned about that. Can you just talk about the different areas there core banking and insurance and capital markets and help of those markets?

Steve Rohleder

Yeah. I'll start with insurance. We had kind of steady growth in the Americas and Asia Pac, but the big growth in insurance came in EMEA. If you look at the other two industries capital markets and banking actually I just observed the numbers for Q4 and looking at how we've grown those two industries, they both grown in double-digits in the Americas over the last two quarter.

So, I think we're holding our own. Make no mistake about it. It’s very, very competitive out there. We've also seen a shift quite frankly or an adjustment, if you will to more outsourcing opportunities, which suites us fine. We just basically our cognize of that and we have deploy the resources to address that part of the market.

So, we're going continue to push in a market. We've got a great leadership team you met here at Analyst Day. And I think that team is going to go after the market in a very aggressive very creative way. They're going to be selective about the deals they go after and they're going to be very focused on driving profitable growth in that segment.

Bill Green

Yeah. Let me just draft and just because I think if you'd stand back and look at it you have hundreds of what we call: “foundation offerings”, which is the thing as we takeout to market and put in front of the client. We have this discussion about discretionary and we assert that not much of what we do is discretionary.

Well, discretionary means doing something and they are doing nothing. The fact is a lot of these companies just need to do something different in financial services. And therefore it's a different set of offerings that we need to bring to the table and it's a different set of outcomes that we need to focus on.

And Steve's point on the outsourcing is: that's a shift there is some people who are looking for cost or guaranteed customer service in cost price performance level. Outsourcing is a way to get leverage from that. And so, it's a shift in the offerings, but the activity really doesn't die down or go away. What happens is we need to bring different skills and different offerings to the table.

Bryan Keane - Credit Suisse

So: the pipeline of financial services still looks pretty good? I know, at the Analyst Day, Karl-Heinz spoke of a couple of large financial deals. So: that's what gives you confidence that you don't expect it to drop off in fiscal year '08?

Bill Green

Well, there are two things. I think, one is: there are larger deals which Karl-Heinz referred to, and then there is a sort of street stuff, right? Now, if you go down the hall here in New York and talk to our capital markets people, they are as busy as the beehive down there. I think the thing is, it's a different set of offerings that we are needing to bring to the market and we still have to convert those. That's our job to go do that.

Bryan Keane - Credit Suisse

All right. Thank you very much.

Steve Rohleder

Thanks, Bryan.

Operator

All right. And we'll go to the line of Tien-Tsin Huang from JP Morgan. Please go ahead.

Tien-Tsin Huang - JP Morgan

Thanks. Pam maybe can you walk us through the change in the cash flow guidance? It looks like its being revised down by a roughly the amount of “reorg liability”. So, I just want to make sure, I'm not missing anything there, since: have you not fully captured the amount of raise in the EPS guidance in relation to the cash flow?

Pam Craig

Well, we did a pretty detailed study of the free cash flow Tien-Tsin. And: yes, the basic math is that the “reorg liability” amount is the amount that we decreased the cash flow guidance by in terms of the annual outlook on that.

Now, there are a number of “puts and takes” that go into cash flow, including changes in our DSOs, and cash payment rights, accounts payable taxes, whatever. So, I think that what we're trying to do is just make sure that with the DSOs, which, again, in the 30s very strong, but we want to make sure that we can cover that. So we ran the numbers and this is the guidance.

Tien-Tsin Huang - JP Morgan

Okay. It sounds like there's conservatism among the working capital after a pretty good performance last year.

Pam Craig

Well, the DSO's in the 30s is incredibly strong, as you know. It's industry-leading and we're very proud of that. And, I believe, our people will continue to maintain that. But yeah, we have that in there.

Tien-Tsin Huang - JP Morgan

Okay, understood. Then, I guess, Steve, I know I ask this, I think, almost every quarter, but: just want to make sure that the growth in the GDN headcount is still consistent with the revenue growth out of the GDN?

Steve Rohleder

Yeah. I mean: I think it's consistent with where we think the GDN should grow. And it's hard to draw, connect one dot growth in GDN to growth in revenue. What is important to us is to make sure that we've connected the growth and the GDN to the growth and demand of the work that we're selling and doing that demand those kinds of services, Tien-Tsin.

So I think we've got a very strong connection. The group that runs the GDN is very sensitive to any kind of adjustment in chargeability or adjustment of demand. They look at the pipeline. They look at what's coming down the pipeline in the next two or three quarters in terms of potential demand. They are very sensitive to what's being booked and the skills that are going to be needed there.

And frankly, because of some of the operating model changes that we've made, they now have flexibility, I think, to move people not only within centers a lot more readily, but across centers. And I think that's helped our efficiency as well.

Tien-Tsin Huang - JP Morgan

Got it. So: are you safe to say you're pleased with the cost structure in the GDN today?

Steve Rohleder

I am. Yes, I am.

Tien-Tsin Huang - JP Morgan

Okay. Thank you. Happy Holidays.

Steve Rohleder

You too.

Pam Craig

Same to you.

Operator

Thank you. And we'll go to the line of Julie Santoriello with Morgan Stanley. Please go ahead.

Julie Santoriello - Morgan Stanley

Thank you. Good afternoon. A question on bookings: The bookings guidance for the year implies about 9% to 18% growth, but the quarter looks like about 8% growth year-over-year, consulting being very, very strong and outsourcing being sort of flattish. Can you comment on that? Especially in light of what Steve had mentioned that you are starting to see some increase in outsourcing demand, but it seems those are not quite showing up in bookings yet. Can you just go into some detail on how bookings are shaping up? Are there any changes or surprises in what's coming through?

Pam Craig

I'll go ahead.

Bill Green

You go ahead.

Pam Craig

Julie, this is Pam. I think, first of all, as you know, bookings are lumpy, and particularly outsourcing bookings are lumpy. So, even though the book-to-bill on outsourcing this quarter was 1.1, we're still targeting 1.2 for the year. Bill, do you want to add some color.

Bill Green

Yeah. No, I guess I would just say we look hard at this, right? And, obviously, because of the economy we're in and the stuff that you guys are saying, now we look doubly hard at it. Importantly, when we stand back and look at it, we remain confident with the bookings momentum that we have and the revenue targets that we have for the company that are the yield out of those bookings.

And one of the things I wish to talk about is activity, right? Which I know is hard for people to metric and quantify. But the activity in terms of, like the buzz in terms of: what people are chasing around here? And: where the opportunities are? Is the same as it's been? And we continue to be focused on it. So frankly, we're relaxed about the bookings and the revenue target.

Julie Santoriello - Morgan Stanley

Thanks. And would we naturally expect over the course of the year: do you think you'll see increasing strength in outsourcing and, perhaps, some moderation realistically in consulting?

Bill Green

I mean, as Pam said about lumpiness, in one quarter two outsourcing things can make a real dramatic difference. And whether they happen in Q2 or Q3 or Q4, I think it's hard to put a finger on that. I do think there are reasons that consulting demand continues to be good. I think there are reasons that the consulting bookings for the quarter were good. If you talk about short-term cost reduction, I mean: that's a consulting assignment, right?

So, there are still a lot of things going on that drive consulting demand. So, I think, within the bandwidth that we expected as we plan the year, we think we're going to stay right within that bandwidth. I would like to see, as we mentioned last year, more acceleration and consulting. But, I think Steve made an important point earlier, and that's the quality of the deals has to be there. And that's something that we've had the luxury of choosing, and we hope we'll still be able to choose the deals that we take.

Julie Santoriello - Morgan Stanley

Okay, great. And just one quick clarification on for those customers that have started down this path of looking for a quick cost savings type of things: does this almost universally mean offshore?

Bill Green

No, absolutely not. It has to do with rationalizing of strategy, our people putting their investments in the right place. They focused on the most profitable offerings. In certain industries it has a lot to do with customer service because a major cost in the certain industries is the cost that it takes to maintain the certain level of customer service. And the question is: how can you maintain or improve that level of customer service for less money? So, I do not at all connect the two.

Now, downstream, might there be opportunities for people to have services performed in a lower cost profile environment, absolutely right. But the going in position is finding and tuning: what you need to do to drive out the cost? Some of the offshoring stuff may be medium or longer term cost improvements, but the shorter term ones may come from classic reengineering Six Sigma and rethinking: how people do things?

Julie Santoriello - Morgan Stanley

That's helpful. Thank you.

Operator

All right. And we'll go to the line of Pat Burton with Citi. Please go ahead.

Pat Burton - Citi

Hi. Congratulations on the quarter. Outstanding numbers in this environment. My question relates to the operating margin outlook. As the year plays out: do you anticipate any improvement in the margins year-on-year? Thanks.

Pam Craig

Hi, Pat. It's Pam. Our annual guidance for operating margin was 12.8% to 13.1%, which is a 10 to 40 basis point improvement over the last year or so. We certainly expect to do at least as well as we did this quarter.

Pat Burton - Citi

Will that come from the G&A side or the sales and marketing? I know you've been making progress on both of those areas.

Steve Rohleder

Yeah. Pat, this is Steve. I kind of went through about four different levers that I look at. I do think that we can get more efficient on the sales side. I think, the G&A side, we've got some targeted goals that we want to hit. We hit them in Q1. I think we're well on our way for the rest of the year as well. But, it's a combination of that. It's a combination of pricing, chargeability in certain areas around the world, and really, getting our projects to deliver on the original deal economics consistently across the place.

Pat Burton - Citi

Thanks.

Operator

Okay. And we will go to the line of [Elizabeth Berkley with Arete Research]. Please go ahead.

Elizabeth Berkley - Arete Research

Yes. Good afternoon. Just on the outsourcing business. Maybe could you just summarize where you are trying to drive higher outsourcing growth? You've talked about this at the last quarter. Can you just talk about the focused areas for driving higher growth in that business? And then also talk about: if you are seeing a shift away to more of a cost focus outside of that vase or the particular company or the pharma sector that you've mentioned? Bill, if you are seeing that elsewhere? Thank you.

Bill Green

Yeah. Elizabeth, let me start with the outsourcing question that you had in terms of specific actions in focus areas where as one. Obviously, application outsourcing is a large piece of our business and we are continuing to push very aggressively not only with new clients, but with existing clients there.

One of the emerging areas that we are focusing on to round that our service offerings is infrastructure outsourcing. We’ve had some great examples of being able to go into existing clients and provide infrastructure outsourcing services. We continue to compete toe-to-toe with a number of organizations out there in this area. And we think it's a great growth area for us to marry technology and some of our outsourcing skills. And then in the BPO area that I would separate that into two buckets, if you will one is in the finance and accounting, learning and procurement areas, where we are continuing to push and seeing some very strong growth.

And then on the vertical BPO side, we've talked a lot about in past earnings calls about where our BPO business is going and the focus on the vertical offerings that we have. I think this time I tried to highlight the fact that we've taken an existing area and expanded it.

And I think that's an important point as we look at how we're really going to expand the vertical BPO business. I think our focus is going to be on adjacent businesses not necessarily going into brand new ones because the cost of investment is lower, and frankly the ability to drive financial results is very much quicker.

Steve Rohleder

Yeah. Let me answer the second part of your question. I think there's been an interesting phenomenon and that a couple of things have been going on in the market in the last sort of three to four months. One is some of the new entrance in the outsourcing business are starting to stub their toes. And those are people that sold sort of cost based deals and they're having delivery issues or service level issues associated with the cost.

The other thing that's happened is as people have gotten more experienced with this, they understand the power of the transformational proposition as opposed to the cost based one. And so, I find that people are a lot more tuned in to: what's the service level? What's the predictability? What's the reliability? All those things as it relates to the outsourcing proposition. And that demand plays to the Accenture strength because our agenda is sort of transforming the processes and operating in a different way to get not only a better cost profile, but an improved performance output.

And so, I think there is a couple of things going on right now, which you tend to think when you get cost pressures people would leap outside for cost. But I think that people have a lot of experience with this now. And some of the outsourcing demand is just an acceleration of certain outsourcing agendas that companies have already had.

And then the last thing is that I don't think there is a board today that isn't asking the management of the company: have you considered leveraging outsourcing in order to perform these processes? But I think people look at it smartly, because a lot of these processes are in fact processes that touch the customer and therefore the quality and profitability of the output and of the provider is essential to them and we think all of those things point in our direction.

Elizabeth Berkley - Arete Research

Can I just ask a quick follow-up on the share buyback policy? Because you bought back 6.7 million shares in the open market. And: could you just clarify the intent of your current and future buyback programs as regards returning capital to shareholders versus simply covering founder share overhang and employee options or [SUs] etcetera? Because, if you look at your total authorization at the end of the quarter, I think you had 4.1 billion and on my calculations that's 116 million shares. And it looks like you still got about a 185 million founder shares that could be transferred before the end of '09, if you could just remind us: the rationale or the philosophy behind your share buyback program? Thanks.

Pam Craig

Yeah, this is Pam. We have a normal course share buyback program from active founders that we use quarterly and we continue to execute that every quarter. We also look for opportunities to buyback in the open market when we think the price is right. And, as you know, we did that in this past quarter. At the Analyst Day, about a month ago I did go through some analysis of what we call the '09 overhang or the shares that come due in '09 and we'll be happy to get into more detail with you on that offline.

Elizabeth Berkley - Arete Research

Okay, alright. Thank you.

Richard Clark

Operator, we have time for one more question.

Operator

Right and that will be from the line of Tim Fox with Deutsche Bank. Please go ahead.

Tim Fox - Deutsche Bank

Hi, thank you. Good afternoon. One question, I guess a multi part, in your discussion earlier talking about some of the possible shorter duration impact hit contracts. I just wondered: if you could talk in general about where durations have gone given the fact that outsourcing contracts have definitely shortened over the past few years? And just wondering: as you look out into the consulting business, do you see any possible risk of shorter duration contracts actually impacting your outlook for bookings for the year?

Steve Rohleder

Tim, this is Steve. On the outsourcing thing I think we've been pretty public about the fact that we as you pointed out. We've seen overall duration go down and while that's happen we look at that, but we also look at the contracts yield for our outsourcing projects and we haven't seen any drop in that number. So, and I think, frankly, it’s safe to say that they have stabilized. We had seen that over the last 12 to 18 months and I think the timeframe right now is petty stable.

On the consulting side, we've not seen any change regardless of whether its customer segmentation work in the retail area or work for in the capital asset management area for utilities or any of the consulting, straight consulting work we have typically its not time sensitive in terms of six months, 12 months whatever its time sensitive in terms of the business outcome that our clients are asking for. And frankly, that hasn't varied much in my tenure here. So, there hasn't been much change and to your question on whether it would impact our outlook, frankly what we have in our pipeline, how that's time phased and the probability of what we've got in there impacts our outlook more than anything.

Bill Green

Yeah I would just add that, our consulting isn’t picky little job, I mean: they are sort of big jobs, people are going to make a decision. They are going to be of relatively long-term duration. They are going to be outcomes based and a lot of the economics are going to be based on delivering a solution. There is an outcome to the company. And so, there is a little less option in terms of the shortage or shortening things up.

Tim Fox - Deutsche Bank

Okay, great. And just one other, maybe for Steve just 41% growth, I think it was year-over-year on your global footprint. Just wondered: if you could comment generally about the hiring particularly in India? We’ve heard from other companies that the hiring seems to be easing a bit, which was certainly different from the past couple of years. But, if you can just comment on overall hiring plans there? How is attrition looking? Wage inflation? Just the general pressures on that market would be great. Thank you.

Steve Rohleder

The attrition is in line with our expectations. We did go through a raise across the board in India that was consistent with where we felt we had to be from a market standpoint. We began to recoup that in the marketplace. Our hiring plans are driven specifically came by the market. And it’s difficult to say are your hiring plans harder or softer, more aggressive, less aggressive in India because we don't look at it that way. What we look at it is the global delivery network and what is the demand for our services across the 30 to 35 centers that we have there. But our hiring in India basically for the quarter as I've looked at it is consistent with what our demands going to be.

Tim Fox - Deutsche Bank

Thank you. Great quarter!

Steve Rohleder

You bet. Thanks.

Pam Craig

Thank you.

Bill Green

Well, let me just say a couple of things in closing. First of all, we completed the first quarter of 2008 with great confidence and with great momentum. We remain committed to expanding our capabilities, strengthening our global franchise and increasing our competitive differentiation. In short, we are committed to winning and driving future growth and profits.

Durability, diversity, differentiation of our business service well, I think you can see that.

We support this with operating discipline and the flexibility required to execute for our clients and for our shareholders.

And lastly, our performance reflects the continued effort by more than 175,000 men and women of Accenture, to continue our break away from the competitive pack. Our emphasis on high performance shapes every single thing that we do. So again, thanks for joining us today. We appreciate your continued support and we wish you happy holiday.

Operator

And ladies and gentlemen, this conference will be available for replay today at 9.45 pm until January 02, 2008 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code of 897991. International participants may dial 1-320-365-3844. Again those numbers are 1-800-475-6701 and 1-320-365-3844 with the access code of 897991.

This does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!