Accenture plc (NYSE:ACN) Q2 2017 Results Earnings Conference Call March 23, 2017 8:00 AM ET
Angie Park - Managing Director and Head of Investor Relations
Pierre Nanterme - Chairman and CEO
David Rowland - CFO
Bryan Keane - Deutsche Bank
Jim Schneider - Goldman Sachs
Tien-Tsin Huang - JPMorgan
David Grossman - Stifel Nicolaus & Company, Inc.
Edward Caso - Wells Fargo Securities, LLC
David Ridley-Lane - BofA Merrill Lynch
Brian Essex - Morgan Stanley & Co.
Joe Foresi - Cantor Fitzgerald
Ladies and gentlemen, thank you for standing by. Welcome to Accenture's Second Quarter Fiscal 2017 Earnings Conference Call. During today's conference all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] And as a reminder, today's conference is being recorded.
I would now like to turn the conference over to Managing Director, Head of Investor Relations, Angie Park. Please go ahead.
Thank you, Shannon and thanks everyone for joining us today on our second quarter fiscal 2017 earnings announcement. As Shannon 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 second quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the third quarter and full fiscal year 2017. 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 the call, including our business outlook are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's News Release and discussed in our Annual Report on Form 10-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 the non-GAAP financial measures where appropriate to GAAP in our News Release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call.
Now let me turn the call over to Pierre.
Thank you, Angie, and thanks everyone for joining us today.
We are very pleased with our financial results for the second quarter and first half of fiscal year 2017. For the quarter, we again delivered broad based revenue growth across many dimensions of our business and we continued to gain significant market share. We see excellent demand for our services especially in high growth areas such as digital, cloud and security-related. Our very strong bookings culture both are relevant and success of our strategy to rotate our business to the new and support our confidence as we look ahead to the rest of the fiscal year.
Here are a few highlights for the second quarter and year-to-date. We delivered very strong new bookings of $9.2 billion for the quarter and $17.5 billion for the first half. We grew revenue 6% in local currency for the quarter and 7% year-to-date with continued strong growth across many areas of our business.
We delivered earnings per share of $1.33 which brings EPS for the first half of the year to $2.91 an 11% increase on an adjusted basis. Operating margin was 13.7% for the quarter and 14.7% for the six months an expansion of 20 basis points year-to-date. We generated free cash flow of $50 million for the quarter and $1 billion year-to-date. And we continue to return a substantial amount of cash to shareholders through share repurchases and dividends including more than $2 billion year-to-date.
Today, we announced a semiannual cash dividend of $1.21 per share which would bring total dividend payments for the year to $2.42 per share a 10% increase over last year.
Now with the first half of the year behind us I feel very good about our business. We see very strong demand in the marketplace for differentiated capabilities and remain confident in our ability to deliver our business outlook for the year.
Now let me handover to David who will review the numbers in greater details. David, over to you.
Thanks Pierre, and thanks all of you for joining us on today's call. Overall we delivered strong results in the second quarter which were aligned with our expectations and position us very well to achieve our full-year financial guidance. We continue to see favorable market conditions in most areas of our business especially as it relates to strong demand for digital, cloud, and security related services which placed us straight as a leader in innovating and leading in The New.
Our second quarter and year-to-date results demonstrate our ability to continue to deliver on the essential elements of our formula for driving superior shareholder value. So before I get into the details let me summarize some of the major headlines.
Net revenue growth in local currency is 6% in the second quarter and 7% year-to-date, continues to significantly outpace the market driven by double-digit growth in all three components of The New including digital, cloud, and security related services. Growth continues to be broad based with positive growth in the vast majority of our industries and geographic markets more than offsetting cyclical market pressures that continue in a few concentrated areas of our business specifically energy, chemicals, and natural resources and communications and media.
Absent those concentrated areas of pressure, the majority of our business grew 9% on a quarter to date basis and 10% on a year-to-date basis. Operating margin of 13.7% for the quarter came in as expected and consistent with last year. Operating margin of 14.7% for the first half of the year represents 20 basis points of expansion.
These results continue to reflect significant levels of investments in our business and our people to further enhance our differentiation and competitiveness in the marketplace. And on a year-to-date basis, we delivered 11% growth in earnings per share over fiscal 2016 adjusted EPS.
Our free cash flow of $50 million in the quarter and over $1 billion year-to-date puts us on a trajectory to deliver on our annual guidance which reflects free cash flow in excess of net income and importantly we continue to execute against our strategic capital allocation objectives, first by investing over $800 million across 16 transactions in the first half of the year and second by returning roughly $2.2 billion to shareholders via dividends and share repurchases.
So as Pierre said, we are pleased with our overall results so far this year and we're encouraged by the trends we see in the market and the potential for even stronger growth and momentum in the second half of the year.
With that said, let's get into the details of the quarter starting with new bookings. New bookings were $9.2 billion for the quarter. Consulting bookings were $4.6 billion with a book to bill of 1.1 and outsourcing bookings were $4.6 billion with a book to bill of 1.2. We are very pleased with our bookings, which landed in the range we expected and represents the third highest level of new bookings over the past 10 quarters.
From a business dimension perspective, we were pleased with our bookings in both strategy and consulting services combined and application services. And as you would expect digital, cloud and security related services continued to be an important theme in the work we contracted with our clients. Looking forward, we began the third quarter with a healthy pipeline and we believe we're positioned for continued strong bookings in the second half of the year.
Turning now to revenues, net revenues for the quarter were $8.32 billion a 5% increase in USD, 6% local currency reflected in our foreign exchange headwind of approximately 2% consistent with the guidance provided last quarter. Our Consulting revenues for the quarter were $4.4 billion up 3% in USD and 5% local currency and our outsourcing revenues were $3.9 billion up 7% in USD and 8% in local currency. Looking at the trends in estimated revenue growth across our five business dimensions, growth was led by operations which posted double-digit growth for the fifth consecutive quarter.
Application Services delivered mid single-digit growth and Strategy and Consulting Services combined grew low single-digits. Once again the dominant driver of our growth was continued strong double-digit growth in The New with all three components going double-digits as well.
Taking a closer look at our operating results, Products our largest operating group led with 15% growth reflecting continued strong momentum in the business. Growth continued to be broad based with strong growth across all geographies and industries. Financial Services grew 8% in the quarter driven by double-digit growth in banking and capital markets globally and overall in both Europe and the growth markets. As expected, banking and capital markets in North America returned to positive growth this quarter.
H&PS came in as expected at 2% growth with positive growth in both Health & Public Service globally and strong overall growth in both Europe and the growth markets. Overall growth in North America was flat. We expect H&PS a to deliver stronger growth in the second half of the year and to deliver full-year growth in the mid-single-digit range consistent with the comments I made in September.
Communications, Media and Technology grew 1% reflecting solid positive growth in North America and double-digit growth in the growth markets partially offset by continued contraction in Europe. From an industry perspective, CMT was led by significant double-digit growth in software and platforms with positive growth in Electronics & High Tech. However, Communications and Media contracted on an overall basis primarily driven by our business in Europe. We expect the revenue growth in our European Communications & Media business will continue to be challenged for the rest of the year.
Finally, Resources revenues decreased 1% in the quarter which is in the range we expected and the storyline remains the same. We continue to see strong growth in utilities which is more than offset by challenges in both Energy and Chemicals and Natural Resources, especially in North America. We expect our Resources group to continue to navigate a challenging environment, but to deliver positive growth in the second half of the year.
Moving now to income statement, gross margin for the quarter was 30.1% compared to 29.8% in the same period last year. Sales and marketing expense for the quarter was 10.5% consistent with the same quarter last year. General and administrative expense was 5.9% compared to 5.7% for the same quarter last year. Operating income was $1.1 billion in second quarter reflecting a 13.7% operating margin consistent with quarter two last year.
As a reminder, in the second quarter of last year we closed our Navitaire transaction which lowered our quarter two tax rate by 1.7% and increased net income by $495 million in diluted earnings per share by $0.74. The following comparisons exclude this impact and reflect adjusted results. Our effective tax rate for the quarter was 20.7% compared with an adjusted tax rate of 15.4% for the same period last year. Net income was $887 million for the second quarter compared with adjusted net income of $805 [ph] million for the same quarter last year.
Our diluted earnings per share were $1.33 compared with adjusted EPS of a $1.34 in the second quarter last year. Days services outstanding were 42 days compared to 44 days last quarter and 39 days in the second quarter of last year.
Free cash flow for the quarter was $50 million resulting from cash generated by operating activities of $155 million net of property and equipment additions of $104 million. Our cash balance at February 28 was $3.2 billion compared with $4.9 billion at August 31. With regards to our ongoing objective to return the cash to shareholders in the second quarter, we repurchased or redeemed 7 million shares for $816 million at an average share price of $117.27 per share. At February 28 we had approximately $4.3 billion of share repurchase authority remaining.
As Pierre just mentioned, our Board of Directors declared a dividend of $1.21 per share representing a 10% increase over the dividend we paid in May of last year and this dividend will be paid on May 15, 2017.
So at the halfway point in 2017 we feel good about our results and our positioning to deliver on our full year business outlook, we continue to be laser focused on driving our business to achieve our core financial objectives which include growing faster than the market, delivering modest margin expansion and strong EPS growth, investing at scale for market leadership, and generating strong cash flow which is both invested in the business and return to shareholders through disciplined and smart capital allocation.
With that, let me turn it back to Pierre.
Thank you, David. Our strong performance in the second quarter and year-to-date demonstrated that we are executing our strategy very well to position Accenture as the leading and most innovative professional services company for the new digital world. With 7% revenue growth in local currency in the first half of the fiscal year, we are clearly growing faster than the market.
This is driven by our accelerated rotations to The New, digital, cloud and security related services which generated revenues of about $8 billion in the first half, more than 45% of total revenues and continue to grow at a strong double-digit rate. And I am particularly pleased that we have achieved these results while continuing to invest for the future in strategic acquisitions, in building assets and solutions and the skills of our people while at the same time returning substantial cash to shoulders.
For Accenture, acquisitions are managing to drive organic growth above the market and we have stepped up our base of acquisitions investing more than $800 million of capital in the first half of the fiscal year. And in the second quarter alone we completed or announced 11 acquisitions to further strengthen our capabilities.
In digital we are acquiring SinnerSchrader, one of the largest digital agencies in Germany. In cloud we acquired solid servision a leading ServiceNow provider. In security we acquired Endgame for the oil services business and announced the acquisition of iDefense and Arismore. Avanade, our majority owned joint venture with Microsoft acquired Infusion [ph] a leading provider of digital transformation services in the Microsoft ecosystem. And we completed three acquisitions that further enhanced our industry deep expertise, Investec Asset Management [ph], [indiscernible] Group Innovation [ph] and Davies Consulting in utilities.
Across Accenture we are leveraging the capabilities we have acquired to bring even more innovation to clients and to drive growth and scale organically. With [indiscernible] which is part of Accenture digital we can with Shell [ph] and Jaguar Land Rover to create the first ever payment system in a car. This new innovation allows drivers to pay at sales stations using an in counter screen and app ultimately delivering a better and more convenient customer experience.
In banking and capital markets our recent acquisitions of InvestTech and Beacon Consulting are further strengthening our asset management capabilities adding deep skills and industry expertise which has enabled us to win new business with top gear asset managers. And in security with the capability of FusionX which we acquired in 2015 we are helping a large international resource company secure millions of daily tractions providing advanced services such as security audit across 15 properties, digital identity management and rigorous testing to prevent cyber attacks.
We also continue to make significant investments in our unique innovation architecture which integrates our capability across research, ventures, labs and studios to pioneer new ways of collaborating with clients to develop and deliver disruptive innovations.
As part of our innovation led approach, we are opening new facilities around the world including several in just the last few months. In Dublin, we open The Dock our new multidisciplinary innovation R&D and incubation hub where all elements of our innovation architecture come to life. The Dock is a launch pad for our more than 200 researchers to innovate with clients and acquisition partners with a particular focus on artificial intelligence.
In Hong Kong, we launched an Accenture Liquid Studio where we are bringing together end-to-end digital customer experience services for clients. In London and Singapore, we opened new Accenture Liquid Studios designed to help clients apply rapid development techniques like Agile methodologies and DevOps to quickly turn concepts into products. And finally in the United States, we are accelerating our innovation investment including 10 new innovation hubs. We just opened our first one in Houston enabling us to collaborate more closely with clients to co-create and scale innovative solutions.
Turning to the geographic dimension of our business, I am going to comment on our result for both the quarter and the first half of the year. In North America, we grew revenues in local currency 4% for the quarter and 5% year-to-date driven by United States, where we continue to grow ahead of the market. And given our strong market position and pipeline we expect to see stronger growth in North America in the second half of the fiscal year.
In Europe, we continue to grow significantly ahead of the market with 7% revenue growth in local currency for both the quarter and the first half driven primarily by double-digit growth in the United Kingdom, Germany and Switzerland. We are confident Europe will keep up the strong pace in the second half. And in growth markets we were very pleased with a 9% growth in local currency for the quarter and 10% year-to-date, led once again by very strong double-digit growth in Japan as well as strong growth in China and Australia. We expect growth markets to accelerate its growth in the second half.
Before I turn it back to David, I want to share a few thoughts on our talent strategy to lead in The New. The large scale transformation of our business is requiring a very significant investment in our people to ensure they have the most relevant skills to serve our clients both today and in the future. We are proactively training and up scaling thousands of people in key areas such as cloud, artificial intelligence and robotics.
In New IT alone which is all about new architectures, intelligence platforms and automation, we have already trained more than 70,000 people in just over a year. Our approach to continuously investing in the scales and capabilities of our people helps us meet the needs of our clients and enhances our ability to attract the very best talent in our industry. And that is why I'm very proud that Accenture was recently named one of the Fortune’s best companies to work for, for the ninth consecutive year.
So with that, I will turn the call over to David to provide our updated business outlook. David?
Thank you, Pierre. Let me now turn to our business outlook. For the third quarter of fiscal ‘17 we expect revenues to be in the range of $8.65 billion to $8.90 billion. This assumes the impact of FX will be negative 2.5% compared to the third quarter of fiscal '16 and reflects an estimated 5% to 8% growth in local currency.
For the full fiscal year '17 based upon how the rates have been trending over the last few weeks, we continue to assume the impact of FX on our results in U.S. dollars will be negative 2% compared to fiscal '16. For the full fiscal '17, we now expect our net revenue to be in the range of 6% to 8% growth in local currency over fiscal '16.
Before I continue with our business outlook, as a reminder, in March 2016, we announced the termination of our U.S. pension plan. We expect to record a non-cash charge of approximately $425 million upon final settlement in quarter three 2017. We will provide both GAAP and adjusted quarter three and year-to-date results.
For operating margin on an adjusted basis, we continue to expect fiscal '17 to be 14.7% to 14.9%, a 10 to 30 basis point expansion over fiscal '16 results. We continue to expect our annual effective tax rate on an adjusted basis to be in the range of 22% to 24%. For earnings per share on an adjusted basis and reflecting our updated revenue range, we now expect full year diluted EPS for fiscal '17 to be in the range of $5.70 to $5.87 or 7% to 10% growth over adjusted fiscal '16 results.
For the full fiscal '17, we continue to expect operating cash flow to be in a range of $4.6 billion to $4.9 billion, property and equipment additions to be approximately $600 million and free cash flow to be in a range of $4 billion to $4.3 billion.
We continue to expect to return at least $4.2 billion through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by slightly more than 1% as we remain committed to returning a substantial portion of cash to our shareholders. And finally for the full year, we now expect to invest in the range of $1.5 billion in acquisitions.
With that let's open it up so we can take your questions. Angie?
Thank you, David. I would ask that you please keep to one question and one followup to allow as many participants as possible to ask a question. Shannon, would you provide instructions for those on the call?
Thank you. [Operator Instructions] And our first question is from the line of Bryan Keane with Deutsche Bank. Please go ahead.
Hi, good morning Bryan.
Hi, good morning David. I just wanted to ask on bookings it came in at $9.2 billion. I know the Street was at $10 billion and $9.2 billion I think is down 3% year-over-year, but it sounds like that was within the range of your expectations. So just trying to gauge was bookings a little bit lighter than you expected or was Street just too aggressive in their assumptions?
And then just secondly on the potential for stronger growth in second half ‘17 may be you can just give us an idea of what that looks like between consulting and outsourcing, in particular consulting slowed a little bit this quarter, but maybe it sounds like it’s going to pick up? Thanks so much.
Yes, so first of all on the bookings – putting aside the consensus estimate what I had signaled last quarter that we felt confident that bookings would be stronger in the second quarter than the first quarter beginning pattern of building through the year which is typically what we've seen. And so we ended up with about $1 billion more in bookings in the second quarter versus the first quarter that’s consistent with the comments that I made and it's in the range that we expected.
I mean, as you know there is – you know in any particular quarter there are few deals that can fall on either side of the line, so we will always have kind of a range that we expect to land in and we are very solidly in the range that we expected. And for the full year, we’re very optimistic about our bookings. As I said we began the third quarter second half of the year with a healthy pipeline and we expect to see continued strong bookings in the third and fourth quarter supporting our revenue guidance.
In terms of the growth, but out type of work which I think was the other part of your question is that right?
I guess he has dropped off the line, so for the full year we expect consulting type of work growth to be in the mid to high single digits and we expect outsourcing type of work growth to be in the mid to high single-digits as well. If you look at it by business dimension, which I also comment on, we think strategy and consulting services combined will be in the mid-single digit range.
So we do see an increase in the growth rate of our strategy and consulting services combined in the second half of the year with the application services in the mid-single digit range we see operations in the double-digit range, and of course The New will continue to grow very strong double-digit growth throughout this year.
Okay, thanks so much.
All right. Thank you, Brian.
And the next question comes from the line of Jim Schneider with Goldman Sachs. Please go ahead.
Good morning, thanks for taking my question. I was wondering if. Hey David, I was wondering may be to followup on a previous question, you delivered pretty good 6% growth this quarter and there was little bit of last quarter came, so I guess, can you maybe talk about, and you talked about the acceleration in the back half of the year. So can you maybe talk about some of the factors that you are seeing that would raise - leave you to not raise your revenue outlook for the full year given the commentary you just made about the back half?
Yes, so let me give a few comments and Pierre will perhaps want to make some comments as well from his perspective. So, let me just start, when we provided full year guidance of 5 to 8 we really entered the year with one possible scenario where the growth in the first half of the year would be relatively speaking, lower than the second half of the year and that scenario in fact is continuing to play out.
As we always say, we started the year, although we had a range of 5 to 8 as we say, working hard each and every day to be at the upper end of the range and that is the, it's still our focus. In terms of what's underneath that, I mean, there's a couple of ways I could kind of help you understand the way we look at the first half versus the second half of the year.
But one way is through the lens of what I have called out as these three concentrated areas of pressure which make up 15% to 18% of our revenue overall. And when you look at those three areas, energy, chemicals, natural resources and communications and media two of those three areas we see and we believe we will see positive growth in the second half of the year relative to where they were in the first half of the year and we have some confidence in that.
Beyond that when you look at the rest of our business, which is growing 10% on a year-to-date basis, even within that we see certain areas of our business that did have positive growth in the first half of the year, but we expect will have even more positive growth in the second half of the year and an industry that comes to mind is health, for example, which has been lower in North America, but we expect will be stronger in the second half of the year, more in kind of the typical growth rates that we expect for health.
So overall, the year is really playing out as we expected. We continue to work hard, to travel land in the upper end of our range as we always do, supporting our confidence level in the second half of the year we narrowed the range to 6 to 8.
Yes, it's hard to be a little bit of additional very well, I mean, to put it very simply we feel very good for the second half of the year. That's it, based on stocks. We have very good bookings, we have good pipeline. We have great momentum in most part of our business, that will give you a clue. We are covering 13 industries. We're big if you well, 13 industries, of these 13 industries 10 are positive and on the 10, six are high single, when I say high single is one is at 9.5, that’s 1 to 10 for simplicity, six would be the double digits.
So you could only be positive when you see such momentum. Indeed, we have three very specific situations, and frankly these three situations at least two are linked to some client situations where indeed the business has been slowing down for absolutely good and valid reasons and we have evidence that the two industries in resources [indiscernible] and energy will be backed in the second half of the year. So I’m extremely positive for the second part of the year.
Okay? Jim thanks.
The next question is from the line of Tien-Tsin Huang with JPMorgan. Please go ahead with your question.
Hi, good morning Tien-Tsin, how are you?
I’m good, thanks for taking my question.
Somebody told me you are in Hawaii this morning, so I guess it’s early for you huh?
Its, yes 2:30 not too bad, I’m sitting outside.
Pierre said he appreciates the commitment, you may not…
Well, not too bad sitting outside the wind feels good. Well that's been your loss so that's the good way to take my mind of things and focus on Accenture. I'll ask about, I guess you just talked about the three areas of pressure. Some of them are linked to client situations. I'm curious if you have been able to replenish your pipeline or are you seeing just comps improve or you are actually selling into those existing clients? Just trying to understand how you're able to sort of remix out of the troubled area and then see improvement there does that make sense?
Yes, I would say it’s a combination of the two. I mean, just to be blunt it is a combination of the two. There is a benefit from the comps getting easier and that's just the math, but more importantly, there are really underlying fundamental improvements that we see and the business activity, the dialog that we're having with our clients. The investment and digitization in addition to the kind of the cost rationalization focus that those industries have had for so many quarters now. And so the comps are part of it, but there is some fundamental improvement in the business, a lot of green shoots that we see that I think have a much more optimistic about the trajectory.
And I would add, if you look at resources, which has been one of the area of watch carefully again that too tough because you are not mentioning utilities. Our utilities business is continued growing double-digits. So this one is on reasonably good fire and we're doing very well, because this industry rotating rapidly to The New and you have a direct correlation in the business with the rotation to The New from our clients and the performance of these industries. This is a simple as this.
And now it is back and I think when I look at the three energy and then you have CNR, chemical and natural resources CNR being the smallest of the three to be clear. And so energy is very important moving forward and we are getting more and more evidence that energy would perform much better in the second part of the year. Yes.
I see, okay just, just let me follow up and just the M&A contribution in the quarter and for the year, it sounds like you upped the spend targets to billion and a half.
Yes, for the full year we continue to expect to be in the range of 2%, but if you peel it back H1 is, let's say closer to 1.5% and H2 would be closer to 2.5% and so in the second half of the year we will see an additional contribution in inorganic relative to H1, but for the full year it will still be in the 2% rang. The additional spend up to$1.5 billion Tien-Tsin, a lot of that will happen in the fourth quarter and the revenue impact of those transactions is much more relevant to FY '18 than it would be FY '17.
Got it. Got it. Thank you so much.
Okay, thank you.
And the next question is from the line of David Grossman with Stifel Financial. Please go ahead with your question.
Good morning David.
Good morning. So I know there's been already several questions about growth, but if you look back consulting growth over the last four years has been pretty lumpy right, 13-14 relatively weak 15 and 16 relatively strong and this year it is falling somewhere in between. And I know we’ve had some fairly significant technology cycles as well as peers had outlined some pretty significant industry cycles impacting growth for the entire industry.
But can you help us think through what the growth in the consulting business should really look like on a normalized basis if there really is such a thing, recognizing that you've got a portfolio and there's always going be pluses and minuses each year?
Yes. I would say on a normalized basis, consulting and strategy services combined would be in the mid-single digit kind of range to let's say high single-digit depending on the cycle that we're in. So it's going to be a mid to high single-digit contributor across our portfolio of businesses.
I mean the consulting growth to be clear as well is connected to this dynamic that we've talked about with our overall growth, meaning that if you look at these three industries that are contracting and primarily because of the cyclical pressures that hasn't had an impact in recent quarters in particular on our consulting and strategy growth rate.
And we think that drag, if you will, that we've seen over the last, let’s take a last few quarters, we will start to mitigate some in the second half of the year. We're also making investments in our consulting business which starts to help drive our growth rate in the second half of the year and beyond as well.
Yes, absolutely, I mean the line, the direction should be mid-to-high single-digit. We believe this is where the consulting business should be. Sometimes they're going to be higher than this because you have a combination of good factors and sometimes you just a bit behind and here we have this combination of these three situations, creating a disproportionate drag on our consulting.
So as we mentioned before, definitely two of the three will get back and so the consulting associated will get back as well. On the other side of the spectrum, we are not only investing in what we call in The New digital, cloud and security, but we, as you know, putting some investments in building extremely deep skills in our yards where we believe there could be higher gross in a very specific way. You've seen the acquisition of [indiscernible] a premium brand in retail North America.
We are doing the same in aviation in very deep skills in investment management where we believe it's going to be a great market and we are making acquisition there on the very targeted basis so, I'm extremely confident that the consulting will be back.
Right. And if I could just ask a quick followup to your comment about rescaling, obviously the pace and breadth of the current cycle has driven the need to rescale at a faster than normal pace. So that aside is it fair to expect after this year that the pace of acquisitions would continue to contribute this 2% rate of growth or would you expect that to come back a little bit as the cycle matures?
Yes, I mean we're putting very significant definition on the skills of our people. I mean we just brought 400,000 mark in terms of people and we want to have 400,000 talented people and by talented people, I mean having the right skills this is what we mean by talented people, the right skills for today and more important, the right skill for tomorrow.
So what we did and not starting now, but starting years ago is to make sure that in trading and indication, we are investing significantly. I think the number is public. We are roughly investing $900 million in training and education to make sure that we have the best skilled people and will bode us well to attract the best talent. So we're combining our organic rescaling if you will $900 million we have digitalized all our training to make sure that our cost of training is extremely efficient.
And I would just impress frankly to recognize my friend Bhaskar Ghosh on what he has been doing with our Accenture Technology business in rescaling last year and what we call New IT 70,000 people. He is managing roughly 200,000 people, Bhaskar roughly if I may say. And the goal for us is to scale 100% of these people over three years, 70,000 plus, 70,000 plus, 70,000. In addition, we are recruiting through acquisitions very deep skills, very deep skills, we believe it's going to take too long to grow organic.
And so we have a good, I think a two pronged strategy, if you will, investing in our people to make them relevant and I think this is something we all talk like to our people. We have a responsibility, I feel that way, I have the responsibility to make them relevant for the future and then complement with high notch, iconic talent we’re getting from the market. So we have a kind of perfect blend.
Very good, thank you.
Alright, thank you, David.
The next question is from the line of Edward Caso with Wells Fargo. Please proceed with your question.
Good morning Ed.
Good morning. I'm only on the East Coast, so not too bad off here.
We appreciate your commitment as well, thanks a lot.
Thank you. My question is really around robotics and artificial intelligence from two dimensions. How much are you applying that to your own business to maybe delink the little bit revenue from people growth and how much are you helping your clients and at what pace is it coming on? Thanks.
Yes, thanks for the question and in answer to your question number one is extensively and answer to question number two is extensively. I mean what we are especially in Accenture Technology and in Accenture Operations and of course in Accenture Digital, we have now infused in Accenture Technology all new capabilities called for us intelligent platforms. The name we are using, the public name is My Wizard. My Wizard is to first in that category of intelligent platform, so you can develop code using more and more intelligent virtual agents.
So we’re doing that massively, but it's not enough. We’re indeed applying to Accenture Technology, technology delivery centers and more important to Accenture Operations in our BPO centers RPAs, I mean Robotic Process Automations that we are executing for Accenture and it’s interesting to see that many clients are visiting us and considering Accenture of now the benchmark and they are learning from what we do to apply to clients.
So, extensively in Accenture because the name of the game is not labor, is productivity and that's always been the name of the game in Accenture. So, we want to operate at maximum productivity and efficiency with talented people, that's what we have in mind. And as you said, starting to see in some parts of our BPO business, the de-correlation between revenue and labor, and we believe strongly that the combination of artificial intelligence, machine learning, Robotic Process Automation in the coming five years will make a significant difference in this correlation between labor to revenue.
From a client standpoint huge demand. Yes, I've just been pitching RPA and closing RPA deals last week to just to give you so, it's extremely relevant why because you know the clients have generally felt the same as we said I remember in one of our IR day, digitalization and rationalization. Digitalization to create new business model and all the architecture we have been putting in place in The New is resonating with that with Accenture active mobility, analytics, cloud and security and rationalization up, is the art of rationalization for robotics and automation and the demand is just growing and we are very well positioned.
My other question is on the benefit side of your pension charge, what kind of in basis points contribution to operating margin will that drive in fiscal 2018? Thanks.
It's not material. And I mean in the scheme of Accenture, the benefits that we're deriving from doing this are not that material in terms of the bottom line.
The next question is from the line of David Ridley-Lane with Bank of America. Please proceed with your question.
Good morning David.
Sure, thank you. Good morning. I did want to maybe touching on that last question, I know you did not manage to gross margin, but the year-to-date gross margin expansion is notable given the longer term trends. Are you seeing the benefit of automation show up there or is this driven more from the revenue mixed shift towards digital? Just trying to get a sense of, is this theme of automation, Robotic Process Automation helping on the gross margin today?
Yes, it is so, most of, by the way, gross margin, let me say that even though gross margin has looked at the last two quarters stayed same, for many reasons we've explained, we really focus more on operating margin. Having so that your question, the big driver I think when you look at the first two quarters has been improvement in our contract profitability. So, our cost to serve clients is one of the bigger major components in our, in our gross margin and we have seen improvements in contract profitability which reflects broadly, some of the improvements we've seen in pricing.
It reflects, there are some mixed shift as we would say we have a higher percentage of higher value kind of added services even higher percentage of those that type of work, which includes digital, but not limited to digital in the mix, et cetera, and as well just the overall efficiency of our payroll structure, which is of course the biggest driver of our cost overall.
And so it's more about contract profitability and managing our payroll efficiency with a high at a high level of efficiency. Is automation in the mix of our improved contract profitability? It is, but in no way would that be a dominant driver. It's in the mix, but with many other things as well.
And then just as a quick one, do you see any drag from regulatory uncertainty among your U.S. health insurance clients or maybe said differently, since you expect an acceleration there, what would be the main drivers to get to that?
We did see an impact in the pace of decision making. When you look back now with the, in the rear view mirror, we did see an impact in the pace of decision making and health in North America during the first half of the year.
We believe and we've got fact points, intangible evidence that we would point to that that slower pace of decision making is behind us and that as we've now turned into the new calendar year, we are every month because we're a month into the new administration then the decision making has resumed at normal levels and that's part of the reason why we are more, why we are positive on improved growth rates in the second half of the year. So we did see an impact in the first half of the year. We believe that that's largely behind us. Okay? Thank you, David.
And the next question is from the line of Brian Essex with Morgan Stanley. Please go ahead with your question.
Hi, good morning and thank you for taking the question. I was wondering if you can maybe dig in a little bit to banking, financial services, you called out North American and Capital Markets mix improving maybe could you, can you provide a little bit of color behind the improvement in that business and what the primary drivers of that improvement might be?
Yes, we I mean all financial services is doing very well. I mean we have been posting I think 8% growth in the…
Yes, banking and capital markets is double-digits.
Is double digit, yes. So I mean we're doing very well. In North America more specially we're starting to see again more demand in The New. I mean secured and we are working in think you are more diversified portfolio of clients and not only the kind of big category leaders if you will due to the more significant regionalization of our business in the United States where we expect great benefits starting in H2. And in addition as I mentioned especially in investment management, which is part of capital Market we've made a few acquisitions, you've seen Beacon and they are providing as well deep skills.
So again, as in everything it’s a combination of two or three factors you're putting together to create growth and we see some more optimism as well from clients linked to the expected deregulation of some part of their business. So, all of this put together, is creating an environment which is getting better.
Great, that's very helpful. Maybe as a follow-up could I ask about Accenture Interactive and it seems kind of interesting moves in the press recently there, how big is that business and is that primarily CMT focused or how do you plan to kind of weave that in with your digital aspiration?
Yes, I’m extremely pleased with Accenture Interactive and you are giving me the opportunity to recognize the leader of Accenture Interactive and you are giving me the opportunity to recognize the leader of Accenture Interactive Brian Whipple, who is just doing a great job in leading that part of the business. In less than only seven years or something like this we created the largest digital pure player in digital marketing. So the digital agency of Accenture is now one of the largest and a category leader.
We are leading in digital design, especially after the acquisition of [indiscernible] and many other acquisitions. The last one being the Karmarama in the U.K., which is a premium independent, the best independent company in the U.K. Digital production, you remember the acquisition of Aventa [ph] some years ago. Digital commerce which of course is very important on the back of the acquisition of Equity we made in the U.S., some years ago and all what we're doing in terms of customer analytics.
So we were very pleased that last year Ad Age ranked Accenture Interactive number one. And for us it's a very critical milestone. We see more and more clients in detailing from the so called holding companies to Accenture Interactive and our regulatory product we are very close to $6 billion in Accenture Active making us a category leader. So, couldn't be more pleased with Accenture Interactive because, sorry to elaborate a bit I know - I'm passionate about this so, I'm sharing my passion with you.
The business in the future will be more and more driven by experience and design of new capabilities, of new products, of new ways of engaging with the customer, consumer, patients, employees. So, for us it was absolutely critical to put on the top of all services the experience, these design led, experience led, kind of capability and just to give you that’s a point I think we acquired [indiscernible] 150 people roughly, 150, 180 something like this less than 200. Now we're going to crack the 800 people being showed, making certainly sure one of the largest pure player in digital creative design, so that's what we do and we're pleased.
Well, it is quite a bit larger than we last heard, so it's great to hear, very helpful. Thank you.
This is what we like to be. I mean we - in our rotation to The New and sorry to be too long about it, in our rotation to The New in interactive mobility edge cloud and security, we want not only to be the number one if you addition this all - this is where we go with our $8 billion in H1 only, but we want to be number one in each of the five. That's what we mean by scaling to lead and this is what we are doing relentlessly.
Shannon, we have time for one more question and then Pierre will wrap up the call.
Thank you. And our final question comes from the line of Joe Foresi with Cantor Fitzgerald. Please go ahead with your question.
Hello. So I guess, what inning do you think digital might be in and what's the next phase of the digital movement?
It's, I mean I would say that the Digital Wave is still and your baseball analogy I would say it is still in the early innings. I mean it's, there is a, if you talked about in terms of the majority curve, it is low on the majority curve. There is a ways to go.
Yes, early days.
If you look at it and of course some capabilities are more mature than the others and when we're putting that Accenture framework we said we got three ways. I mean the digital consumer and this way you got maturing a lot because I mean you see this is totally where we are doing the majority of Accenture Interactive business of around $6 billion.
Then you have the digital enterprise, how you digitalize all the parts on the enterprise and here the robotics and the automation, will bring a lot, so I think this is coming and then what we are calling digital operations and IOT and this is nascent to be on us and that might be certainly the biggest wave of the three. And so we are positioning Accenture already in what we’re calling industry X.0. We are probably 4.0 as we speak, but that will be 5.0, 6.0 and we’re positioning a lot Accenture of mobility, connected platform, Internet Of Things.
We have already developed many partnerships in the ecosystem with OEM providers to extend our reach to this industrial internet. We have labs. I am thinking about what we have in Bangalore, what we have in Beijing where we are developing very deep industry solutions in the context of the IOT. So it’s early days, I mean it’s going to be a wave for probably a couple of decades.
Okay. And then just as a quick followup how is competition in outsourcing particular pricing? Thanks.
I would say – really no notable change in the competitive landscape in outsourcing if you’re maybe asking specifically about the application maintenance piece of our application services, that continues to be a very, very competitive pricing environment. So that’s more of the same and I would say if you look at BPO and another big piece of outsourcing I would say no notable change.
So no notable change, but some at Accenture, again because if there is something we hate in our company is commoditization of services. So we’re fighting against commoditization always to move and to rotate to higher value services. The business you’re mentioning is subject to commoditization at great pace.
Our answer to fight against commoditization has been to infuse as I mentioned before through Bhaskar Ghosh and Debbie Polishook leading Accenture technology in our country operations, so a lot of robotics, a lot of automation, less labor arbitrage, more technology, more intelligence. And so indeed, we want to make these activities more tech automated led, less labor intensive like many of our competitors been doing and we are following a very different trajectory.
Okay it’s time to wrap up. Thanks a lot you have been so patient with us. Thanks again for joining us on the call today. As you can tell and have heard from David and I, we are very confident in our ability to deliver another strong year in fiscal year 2017 to continue gaining significant market share as we do. To even further accelerate our rotation to new innovative services and at the same time as we are investing significantly for the future, continuing delivering value for our clients, our people and our shareholders. At the same time, we transform Accenture to be even more successful. We look forward to talking with you again next quarter. In the meantime, if you have any questions feel free to call Angie and her team. All the best and talk to you very soon.
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