KC McClure - Managing Director, Head of IR Pierre Nanterme - Chairman and CEO David Rowland - CFO.

Tien-Tsin Huang - JPMorgan Edward Caso - Wells Fargo Securities Brian Essex - Morgan Stanley Lisa Ellis - Sanford Bernstein Moshe Katri - Cowen and Company Dan Perlin - RBC Capital Markets Jason Kupferberg - Jefferies Bryan Keane - Deutsche Bank.

Ladies and gentlemen good morning, thank you for standing by and welcome to the Accenture’s First Quarter Fiscal 2015 Earnings Conference Call. At this time all lines are in a listen-only mode. Later there will be an opportunity for your questions. (Operator Instructions). And as a reminder this conference is being recorded.

I would now like to turn the conference over to our host Head of Investor Relations, Ms. KC McClure. Please go ahead..

Thank you Tom and thanks everyone for joining us today on our first quarter fiscal 2015 earnings announcement. As Tom just mentioned I am KC McClure, Managing Director, Head of Investor Relations. With me today are Pierre Nanterme, our Chairman and Chief Executive Officer; and David Rowland, our Chief Financial Officer.

We hope you’ve had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results.

David will take you through the financial details, including the income statement and balance sheet along with some key operational metrics for both the first quarter. Pierre will then provide a brief update on our market positioning before David provides our business outlook for the second quarter and full fiscal year 2015.

We will then take your questions before Pierre provides a wrap-up at the end of the call. As a reminder when we discuss revenues during today's call we're talking about revenues before reimbursement or net revenues.

Some of the matters we'll discuss on this call, including our business outlook, are forward-looking and as such are subject to known and unknown risks and uncertainties, including but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q and other SEC filings.

These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During our call today we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.

We include reconciliations of non-GAAP financial measures where appropriate to GAAP in our news release or in the Investor Relations section of our Web site at accenture.com. As always Accenture assumes no obligation to update the information presented on this conference call. Now let me turn the call over to Pierre..

Thank you KC, and thanks everyone for joining us today. We had an excellent first quarter and I am extremely pleased with our results. Our revenue growth was broad based including strong growth in both consulting and outsourcing as well as double-digit local currency growth in four of our five operating groups.

We expanded operating margin, delivered double-digit EPS growth and returned substantial cash to our shareholders. Our very strong results demonstrate that we’re executing a growth strategy that is both highly relevant to our clients and highly differentiating for our country.

David will provide more detail in a moment but here are a few highlights from the quarter. We delivered new bookings of $7.7 billion in line with our expectations. We grew revenues 10% in local currency gaining significant market share. We delivered outstanding earnings per share of $1.29 a 12% increase.

We delivered operating margin of 15% to 20 basis point expansion. We generated very strong free cash flow of $821 million and continued to have a rock solid balance sheet ending the quarter with a cash balance of $4.5 billion.

And we returned $1.3 billion in cash to shareholders through share repurchases and the payment of our semi-annual dividend of $1.2 per share, a 10% increase over our previous year. So we are off to a very good start in fiscal year ‘15 and we have raised our outlook for revenue growth for the full fiscal year.

Now let me hand over to David, who will review the numbers in greater detail. David over to you..

Thank you Pierre happy holidays to all of you and thank you for joining us on today’s call. As you heard in Pierre’s comments we delivered a very strong first quarter building further in the momentum that we established in the second half of last year.

Just a few months ago at our investor analyst day I outlined our focus on three imperatives for delivering shareholder value and certainly our quarter one results and the updated guidance that I will provide shortly illustrate our ability to manage and drive our business in a differentiated way.

So before I get into the details let’s look at our results in the context of the three imperatives. Starting with durable revenue growth we expanded our business by over $500 million in the quarter with 10% growth in local currency.

We had positive growth across all operating groups with four of the five achieving double-digit growth, strong balanced growth across all three geographic areas and the highest growth rates in over two years in both consulting and outsourcing.

With respect to sustainable margin expansion we expanded operating margin by 20 basis points while at the same time investing in our business.

The actions that we put in place during the second half of last year are yielding results and while optimizing profitability requires an ongoing relentless focus, we’re very encouraged by the progress we’ve made in recent quarters.

And finally regarding strong cash flow and disciplined capital allocation we generated over 800 million in free cash flow and delivered roughly 1.3 billion to shareholders through repurchases and dividends. With that said let’s now turn to some of the details starting with new bookings.

New bookings for the quarter were 7.7 billion with consulting bookings of 3.9 billion and a book to bill of 0.9 and outsourcing bookings of 3.8 billion and a book to bill of 1.0.

This level of new bookings is consistent with what we signaled on the September earnings call that bookings would be lighter in quarter one and then build throughout the year.

We’re pleased with the composition of our new bookings specifically with the portion of our new bookings which we expect to be recognized as revenues this fiscal year which improved our revenue visibility and supported increasing our revenue guidance for the full year.

We see positive trends in our overall pipeline and are well positioned to deliver a higher level of bookings in the second quarter. Turning now to revenues, net revenues for the quarter were 7.9 billion, an increase of 7% U.S.

dollars and 10% local currency, reflecting a negative 3% FX impact compared to the negative 2% impact provided in our business outlook last quarter. On both an FX adjusted and unadjusted basis, we were well above the top end of our guided range. Consulting revenues for the quarter were 4.1 billion, up 4% in USD and 7% in local currency.

Outsourcing revenues were 3.8 billion, up 11% in USD and 14% in local currency. Before I cover the operating groups, let me provide some insight on the primary drivers of our growth in the quarter.

Digital related services continue to be a growth engine and contributed very significantly to our overall growth with strong results across the board and Accenture Analytics, Accenture Mobility and Accenture Interactive. Operations and application services were also highlights in the quarter.

Operations generated double digit growth in both the BPO and infrastructure services and we saw strong growth in application services as well. Looking at the operating groups, we were very pleased with the 15% growth in communications, media and technology.

Overall growth was broad based driven by strong double-digit growth in both consulting and outsourcing across all three industries and in North America and the growth markets. Digital related services, cost optimization and continued execution of large transformational projects were the primary drivers of growth.

In H&PS the 13% growth in the quarter was led by very significant growth in our health business, particularly in the public sector driven by our work with federal health clients, state health exchanges and Medicaid related work. Digital related services were also a strong growth driver across H&PS.

Financial services grew 11% led by banking and capital markets globally with particularly strong growth in Europe. Clients continue to be focused on three main areas; risk and regulatory, cost optimization and digital related services, especially in distribution and marketing.

Products, our largest operating group, delivered 10% growth driven by double digit growth in both consulting and outsourcing and another quarter of broad based strength across all industries and geographic areas.

digital and cost optimization were significant areas of focus for clients in this operating group as well and application services was also a driver with strength in ERP related work. Resources grew 2%, up from last quarter, as we continue to be pleased with the progress we’re making in positioning for sustained positive growth this year.

Ongoing challenges in natural resources continued to offset growth in the other three industries, most notably, chemicals, where we had significant double digit growth. Cost optimization is a dominant theme across resources, which has resulted in strong demand for operations and application services.

Moving down to income statement, gross margin for the quarter was 32.2% compared with 33.3% for the same period last year, down 110 basis points. Sales and marketing expense for the quarter was 11.5% of net revenues compared with 12.6% of net revenues for the first quarter last year, down 110 basis points.

General and administrative expense was 5.6% of net revenues compared with 6.1% of net revenues for the first quarter last year, down 50 basis points. Operating income was $1.2 billion for the first quarter, reflecting a 15% operating margin, up 20 basis points compared with quarter one of last year.

Our effective tax rate for the quarter was 25.1%, equal to the effective tax rate for the same period last year. Net income was $892 million for the first quarter compared with $812 million for the same quarter last year. Diluted earnings per share were $1.29 compared with EPS of $1.15 in the first quarter last year.

This reflects a 12% year-over-year increase. Turning to DSOs, or days services outstanding, continue to be insulating. There were 37 days, up from 36 days last quarter. Free cash flow in the quarter was $821 million, resulting from cash generated by operating activities of $873 million, net of property and equipment additions of $52 million.

Cash flows in the quarter were positively impacted by shift in the timing of a portion of compensation payments, which were paid in quarter one in prior years and beginning this year will be paid in quarter two with no impact to full year cash flow.

Moving to our level of cash, our cash balance at November 30th was 4.5 billion compared with 4.9 billion at August 31st and reflects our share repurchases this quarter in addition to higher dividends we paid in November. Moving to some other key operational metrics.

We ended the quarter with a global headcount of about 319,000 people and we now have approximately 218,000 people in our global delivery network. In quarter one our utilization was 91% we’ve updated the methodology we used to calculate our utilization metric to include all billable headcount.

This change increased utilization by about 3% and accounts for the increase from quarter four. Attrition which excludes in voluntary terminations was 13% compared to 15% quarter four and 11% in the same period last year. Lastly we now expected at least 19,000 will join our company in fiscal ’15.

Turning to our ongoing objective to return cash to shareholders. In the first quarter we’ve repurchased redeemed approximately 8.4 million shares for $670 million at an average price of $80.25 per share. At November 30 we had approximately $4.1 billion of share repurchase authority remaining.

Also in November we paid a semi-annual cash dividend of [$1.02] [ph] per share for a total $679 million. This represented a $0.09 or 10%, over the dividend we paid in May. So in summary, we’re off to an excellent start in fiscal 2015.

That said, the environment continues to be challenging which requires that we manage our business with rigor and discipline each and every day which we are committed to doing. Now let me turn it back to Pierre..

Thank you David.

At our Investor and Analyst Conference in October we provided an update on our growth strategy including the investments we’ve made and the actions we’ve taken to make [indiscernible] Accenture even more relevant, differentiated and competitive in the marketplace and our excellent result this quarter demonstrate the successful execution of our strategy across the different dimensions of our business and that we are growing significantly relative to market.

Let me share with you a few example of the outcome based work we are doing for our clients, as well as some key investments and initiatives we have announced recently. In Accenture Strategy our unique approached combining business strategy and technology strategy is resonating well we see with executive.

A great example is the work we are doing with one of the largest bank in Canada where our industry expels our designing and implementing a global technology strategy to drive 20% ongoing annual savings by optimizing the bank's portfolio of applications.

In Accenture Digital we continue to invest to expand our capabilities in Accenture Interactive to better serve Chief Marketing Officers. Earlier this month we announced acquisition of Reactive Media one of the Australia’s leading independent digital agencies.

Reactive specializes in creating differentiated customer experiences through digital channels such as apps, and e-commerce websites. And we are benefiting from the investment we have made to enhance our capabilities in Accenture Analytics.

We are working with a European auto company to include forecasting, pricing and promotion towards thousands of parts across 18 countries. We are leveraging our [strategy] [ph] in supply chain analytics and the spare part app from our recent i4C acquisition to help our clients drive $65 million in new path revenue.

In Accenture Technology we just announced a major strategic initiative with Microsoft to drive enterprise cloud adoption. The Accenture hybrid class solution for Microsoft Azure will provide a new wave for our clients to transform to a truly enterprise wide hybrid cloud environment.

The unique solution is being co-engineered across Accenture, Microsoft and Avanade our joint venture to bring new capabilities and innovation to our enterprise clients. In Application Services we continue to compete to win by providing our clients with the very best technology services at the most competitive cost.

We recently expanded our relationship with the long standing clients in resources to drive an IT transformation to enable greater business agility.

We are managing more than 200 ERP, data and digital applications across a wide range of platforms leveraging the capabilities of our global delivery network in India, The United States, Spain, Brazil and Costa Rica. And finally in Accenture Operations the capabilities we’ve built were key to a recent win with a global automotive client.

We are operating it end to end marketing service across multiple brands and markets by combining our industry expertise with our strategy, digital, analytics and operations capabilities we are helping transformed the company's digital marketing and increase digital sales.

I am also very pleased that in capital markets we signed our second client for Accenture post trade processing. Our industry business service to manage securities operation for investment banks which we created a year ago with Societe Generale as our first client. Turning to the geographic dimension of our business.

I am very pleased with the balanced growth we delivered in the first quarter across all three regions. In North America we grew revenues 12% in local currency. Our business in the United States continues to perform extremely well with strong double-digit revenue growth in the quarter.

In Europe despite the continued challenging economic environment we grew revenues 9% in local currency driven by double-digit growth in Germany, Italy, France and Norway. And in our gross markets we delivered revenue growth of 9% in local currency.

I am very pleased that Brazil is back, with strong double-digit growth and we continue to perform very well in Japan with another quarter of double-digit growth and I am also pleased with our strong growth in Australia.

So we see very good momentum in our business and have delivered an excellent first quarter on top of a strong second half of fiscal year ‘14.

At the same time we are monitoring carefully the macroeconomic environment the significant fold in global oil prices since last June, could boost growth in the global economy but also create a more challenging environment for companies in the energy sector and certainly contributes to greater uncertainty and volatility in the marketplace.

We continue to operate in a fast changing environment driven by so much disruption and in this context we see significant opportunity and demand for Accenture’s highly relevant and differentiated services.

To capture additional market share and drive sustainable profitable growth we will continue to leverage our strong client relationship, our deep industry expertise, our unique position in the technology ecosystem, our broad global footprint and even more important, the passion of our 319,000 men and women of Accenture.

With that I will turn the call over to David to provide our updated business outlook for fiscal year ‘15. David, over to you..

Thanks Pierre. Let me now turn to our business outlook. For the second quarter fiscal ‘15 we expect revenues to be in the range of 7.25 billion to 7.50 billion. This assumes the impact of FX will be a negative 5% compared to the second quarter of fiscal ‘14.

For the full fiscal year ‘15 based upon how the rates have been trending over the last few weeks, we now assume the impact of FX on our results in U.S. dollars will be negative 5% compared to fiscal ‘14. For the full fiscal ‘15 we now expect our net revenues to be in the range of 5% to 8% in local currency over fiscal ‘14.

For the full fiscal year ‘15 we continue to expect new bookings to be in the range of $34 billion to $36 billion. For operating margin we continue to expect fiscal year ‘15 to be 14.4% to 14.6% a 10 to 30 basis point expansion over fiscal ’14 results. We continue to expect our annual effective tax rate to be in the range of 26% to 27%.

For earnings per share we now expect full year diluted EPS for fiscal ‘15 to be in the range of $4.66 to $4.80 or 3% to 6% growth over fiscal ‘14 results. Absent the higher FX headwind which impacts EPS by $0.14 our EPS range would have increased by $0.06 driven by the higher revenue growth range.

Now turning to cash flow for the full fiscal ‘15 we continue to expect operating cash flow to be in the range of 3.95 billion to 4.25 billion, property and equipment additions to be approximately 450 million and free cash flow to be in the range of 3.5 billion to 3.8 billion.

Finally we continue to expect to return at least 3.8 billion through dividends and share repurchases and also expect to reduce the weighted average diluted share outstanding by approximately 2% as we remain committed to returning the substantial portion of cash to our shareholders. With that let’s open it up so that we can take your questions. KC..

Thanks David. I would ask that you each keep to one question and a follow up to allow as many participants as possible to ask a question. Tom would you provide instructions for those in the call please..

Thank you. [Operator Instructions]. Our first question today comes from Tien-Tsin Huang representing JPMorgan..

I guess I was surprise to see you increase your revenue growth guidance this early in the fiscal year on characteristic; it’s good obviously but just sounds like faster booking conversion if I heard that correctly.

Is that a structural change that could persist here for few quarters? Or is this more of a temporary phenomenon that we should consider?.

Certainly the composition of our bookings in the first quarter was an influence of the 10% growth and as I commented Tien-Tsin you and others have heard me reference previously what I refer to as annual contract value.

So it’s the portion of our total bookings or the total contract value that converts to revenue in the fiscal year and we were very pleased with that number in the first quarter.

And really that’s been a trend that we’ve seen really going even to the back half of last year as our growth went from 7% as you know in the third quarter to 8% in the fourth quarter.

And you’ve also heard me mention that as important as the larger transformational projects are to us, we also have been focusing our client teams more on thinking about the annual contract value of the work that we sell and deliver to clients.

And I think we see some of that reflected in the growth in the first quarter and also in the second half of last year..

And my follow up then just I know that you didn’t update your bookings forecast despite the big FX headwind. So, I know it’s a really wide range. But is that effectively ways in constant currency bookings to try to better tie that to the constant currency revenue comments? Thanks..

It is just mathematically it’s effectively arranged for the reasons you’re pointing out. I mean, on the bookings front, we feel very good about our pipeline. We are only one quarter into the year. We still think that the 34 to 36 range is the right range for us to be focused on. And for that reason we didn’t change it even though the FX did change..

Thanks..

We’ll go to line of Edward Caso with Wells Fargo Securities. Please go ahead..

I was hoping you could give us a little bit more color on the impact of oil prices both on the positive side where you think you would see it and also on the negative side within your energy sector? And maybe talk a little bit about what your clients -- you're seeing them react at this point are they reacting already? Thank you..

This is Pierre I will pick up that one. As we speak and we comment almost as of today, we’ve not yet seen any form of significant impact in our business with what’s happening. I believe that these big organizations in energy, oil and gas are just watching the situation.

It has been very volatile this last few weeks and I guess our clients in these companies are waiting a bit to understand whether there is going to be some form of stabilization and when you have some form of stabilization you can stop executing your strategy.

But as we speak we're not seeing any different pattern with our clients and I would characterize my dialog as being in a watching mode not panicking..

Now that the energy vertical I believe is about 6%.

Is it long term -- can you give us a sense for what the mix is consulting versus outsourcing? And how quickly if your clients get more nervous it could get dial back?.

Yes, if you look at it, I guess, it’s not going to be very different from the mix of Accenture from consulting and outsourcing standpoint. So, indeed, a good portion of the business going to be around outsourcing contract with long term commitment.

As you know, we have even some clients where we are doing a business process outsourcing operations a very large and important client where we are doing finance and accounting. So these are kind of portion where which are contracted for long term and which are of course mission critical for the clients.

So to answer your question the level of vulnerability would be more around the short-term consulting project and so forth, which would be a part of this 6%. So I guess that would probably impact something like a portion of 3%, if you will..

Thank you..

We’ll go to line of Brian Essex with Morgan Stanley. Please go ahead..

Good morning and thank you for taking the question. I was wondering if you circle back a little bit more or less [ACV] and tremendous [indiscernible] my math wrong tremendous employee headcount growth in the quarter.

When I look at that relative to software bookings although it’s higher conversion rates how much visibility do you have in the headcount and maybe you can help give us a little bit of color in terms of where you’re hiring and the mix of hiring given that revenue per head has been down little bit.

What is the visibility that we’ve got aggressive [indiscernible] growth?.

First of all, just in terms of visibility and how that influences our supply planning. I mean, first of all, as you know, we are very effective at managing the supply side of our business. It’s a core competency of ours. And we are managing, adjusting and tuning the supply side including hiring daily if not hourly.

Now in terms of the growth in headcount, certainly and I think the tone of the comments hopefully indicated as much, we feel very good about our business. We exited last year with good momentum, that momentum translated into strong growth in the first quarter.

It translated into a lower dollar value of booking but yet a very high quality of bookings with respect to how it will benefit revenue this year. And if you reflect on the guidance that we gave for the second quarter the upper end of that range is 10% in local currency.

And so what all of that points to is confidence in our business and that underpins what we’re doing on the headcount front. Now as it relates to headcount one of the many but important differentiating characteristics of Accenture is GDN and we continue to invest heavily in GDN including on the talent side.

And so if you look at the recruiting that we did in the first quarter as you can see in the numbers its biased towards GDN but yet it’s important to recognize that we’re hiring in just about every geography around the world and we’re hiring meaningful numbers of people in all of our local markets.

So I think the headcount just reflects the confidence that we have in our business..

Okay and just as a follow up, is there any [deal] [ph] in particular that you’re -particularly excited about? I know at the Analyst Day appears pretty confident about BPO in Europe.

Is that actually materializing now and you’re seeing greater traction in that deal particularly with regards to BPO and maybe impact longer term upside downside to your full year forecast?.

Of course on the country I am most excited [indiscernible] no doubt. Where we add a quarter I would characterize that’s fabulous based on fact nothing to do with my nationality of course. But I am pleased with what’s happening. I am extremely pleased with the sustainability of our performance in the United States.

It is very important it is the largest market of Accenture and it is I would say the global market where things are happening in our industry.

This is where things happening from a digital standpoint, from an innovation standpoint as well from a disruption standpoint from an energy standpoint we can comment all of this and it’s for us all goodness that we are doing so well in the U.S. We are gaining market share and it’s been the case now for with this last four years.

So it's not the story of a quarter.

I am extraordinarily impressed with what we are doing in Europe and I am mentioning impressed because we all know that the economic contact and conditions in Europe are very different from the U.S and driving 9% local currency growth in the European market is very significant including growths in our most mature market.

I mean growing in Italy double digital digit, growing in France double digit, growing in Germany double digit it’s a big achievement for Accenture and why we’ve been able to do that to get back to your first question, indeed we have these last couple of years we have excellent traction in outsourcing, application outsourcings and we’ve been able to evolve our portfolio of business to BPO and we have some very landmark deals specially in electronic and hi-tech in business process outsourcing but as well as in banking in Italy just to get two illustration explaining France and Italy and the good news I would say this quarter from a European standpoint is consulting is back which is demonstrating that our clients are starting to re-invest in consulting first in digital related services couldn’t be more pleased with our digital business at Accenture.

I would characterize on flyer not being emphatic but as well we see good opportunities again back in big ERP..

We have a question from Lisa Ellis with Sanford Bernstein. Please go ahead. .

Can you describe in a little bit more detail I know you watch the book to bill number pretty closely. And now two quarters in a row like the consulting to book to bill is spend less than one and I know what your saying is that’s because the mix of those services are such they’re rolling through quicker.

Can you just talk about that, is a conversion time or what exactly is going on under the covers their?.

Yes I guess just couple of thoughts. First of all as you know Lisa watching our business the bookings as we’ve always said probably said a thousand times the bookings can be lumpy across the quarters.

And I think some of what you see this quarter is lumpiness I mean sometimes it’s really an insignificant difference as to whether or not we close let’s say one or two larger deals the last week of the quarter or the first week of the next quarter. It’s really just a timing issue.

I will say by the way if I’ll just take this opportunity to point out that in the quarter we did have six clients with bookings over a $100 million and that’s a healthy number by any one standard but for us it’s a little bit lighter than what we’ve seen in some quarters in the last four to six.

And so that was an influencing factor in the first quarter. Nonetheless we very pleased with the quality of what we sold as I said.

And so we don’t read anything through in terms of the fact that we had several very strong quarters, last quarter was a little bit lighter, this quarter as I characterized it, but yet if you look at our guidance range for the full year and if you just do the math then that tells you kind of what we’re thinking about in terms of kind of on average what our bookings would be for the next three quarters and of course that would put the bookings right back in the sweet spot of our book to bills.

So if I go to where you stared we still focus very much on the book to bill metric of 1.0 to 1.1 for consulting and at least 1.2 for outsourcing but that doesn’t mean that hit it every quarter and when we don’t hit it every quarter we’re not worried about that we’re really focused on how we perform against those metrics really over kind of a multi quarter period.

And I think for this fiscal year you’ll see it play out in a way that the book to bills will look normal to you if you will..

And then just one real quick follow up. I know you always talk about don’t focus on the operating margin number and not the distinction between gross margin versus net, because expenses kind of fall in a different bucket.

But I an environment we’ve been increasing mix of consulting, I was sort of surprise to see that the gross margins continued to decline I would have I guess that would be the other way around.

Can you just talk a little bit about that dynamic?.

Absolutely and I would have been disappointed Lisa had you not asked that question. Hey it’s a good question and at the risk of being redundant I am just going to anchor back to some of the things [indiscernible], but I’ll give you some nuggets for the quarter as well.

And so just for the benefit of everyone who's listening, we do really focus on operating margin. And at the end of the day what we really focus on at the highest level is driving a business that are payroll cost and are non-payroll cost evolve in a way that supports margin expansion.

And so if you look at payroll as an example we’re much more concerned about the overall efficiency of the payroll, then we are the portion of the payroll that is reflected in sales and marketing versus cost of services at any particular point in time.

I think maybe if I stay at the level that is appropriate, let me just point out a couple of things on gross margins. The first thing is and this is little bit of the dynamics that you have to understand is that our contract profitability actually was up year-over-year.

So this is not an issue but this is not in gross margin driven by contract profitability pressures in the quarter. So what is it then? Well we have a lot of other cost that go into gross margin. We have recruiting cost; we’re hiring a lot of people in the first quarter. We have training costs, when we hire people we train them.

We have types of our investments show up in gross margin, I characterized that what we’re focused on is investing in our business while at the same time growing revenue and expanding profit. So you have other things like other components of payroll variable comp as you know shows up in gross margin.

So there are many factors that show up in gross margin to the root of your question it was not contract profitability, contract profitability increased and operating margin increased overall at 20 basis points and that’s what we’re all about..

And we will go to the line of Ashwin Shirvaikar. Please go ahead..

I guess a couple of questions on revenues. One is with regards to the contribution of acquisitions to this quarter. Of you could talk about that and then not a related question but also revenue question? How do you get the FX headwind of 5%? And maybe I mean I am getting 3.5%, you guys are doing a pretty good job of telling us what the revenue mix is.

So I am kind of wondering if maybe use FX as a part of being conservative overall given the uncertainty of rates..

Yes, so let me just start off with on the inorganic piece. I think last quarter I said that it would be around 1%, 1.5% for the year. And quarter one was clearly in that zone, which means the simple extrapolation is that most of our growth was organically driven.

And so when you look at the 10% in the context of what I just said, it’s another indicator of the health of our business. Ashwin on the FX we go through a process and it’s been a process we’ve done for as long as I can remember which is probably back to the first quarter of being a public company.

We do a process where we look at the rates on a daily basis in the two to three weeks leading up to the earnings call and we look at what the trends are in the most recent two to three weeks. I mean there is -- it’s really more -- it’s objectively driven. We don’t try to speculate on what rates might do going forward.

And if you look at the objective analytics based on the distribution of our currencies and we have the rates have trended then you come up with a solid 5%. And I just say it’s a solid 5%..

Okay. And maybe we can take that one up offline. But the second question I have is with regards to margins and you just went through on the previous question pretty good description of the various cost and such.

But the margin improvement of 20 basis points I am kind of curious as you look at it and you look at your forward bookings what’s in your pipeline in other words, one of the factors that have got to be helping you on a forward looking basis.

Is that your mix has gone from 46% consulting to 50% consulting? But also you’ve hiring so many people in regards to GDN which should presumably be able to help margins. My perception has also been based on my checks that the strong digital and mobility type work that comes through is higher margin.

So I am really curious what’s been on the operating margin basis, what’s the offset that gets you to 20 basis points? I’d expect you guys do 30, 40 basis points..

So that was a statement or question?.

The last five words were a question..

Again, we are managing our business to drive sustainable margin expansion in the 20 to 30 basis point range.

And as part of that, critically important as we’re committed to investing in our business which includes investing in our people, we balance those things in the context of our results to deliver as predictably as we can in that 10 to 30 basis point range and we landed at 20. And so that’s it..

Okay, any color on this start-up cost turn some of the BPO things you signed? I mean any other color?.

Not really and nothing to add beyond what I’ve said there is..

Our next question is from Moshe Katri with Cowen and Company. Please go ahead..

Thanks. Just not to be the [horse] [ph] here going by the discussion on margins I think [Technical Difficulty] went up by a couple 100 basis points, I think to 300 basis point. Again how does it reconcile with the drop in gross margins.

I mean it’s a pretty big expansion in the [indiscernible] I didn’t say attrition I meant to say utilization rates, I think went up to 91%. How does it reconcile with the gross margin drops during the quarter? Thanks..

Thanks for the question and I guess maybe opportunity to reiterate something that I’ve said in the script because it’s an important point to understand. So you are aware that starting a few quarters ago that we with our headcount reporting we now have billable headcount as a line item.

We have aligned the billable headcount with the utilization metric more directly. And as a result of that, so what does that mean? That means that we’ve now included people in the utilization metric that are typically people who are working on outsourcing contracts that previously were excluded.

So they’re now included in that metric which the change increased our utilization to 91%, 3%. Absent that change, the utilization effectively did not change at all.

So the utilization is really just -- we redefined how we report utilization to include all billable headcount which I think is going to be easier for certainly for us and for the outside world going forward..

That does make sense. And then just briefly we’ve [Technical Difficulty] pointed to a weaker sentiment and over extended budget cycle as those financial services vertical.

Does that sign any -- I mean is it something that you guys are doing out there? Can you give us any color on that?.

Moshe, this is KC, I'm sorry, we’re having a tough time hearing you, you’re breaking up a little bit..

Which vertical were you asking about?.

FS, financial services..

Did you just want a little color on financial services?.

What I said was that a survey point to weaker spending sentiment and over extended budget cycle in financial services vertical and I am asking if you guys can comment on that? Are you seeing any of this in your business? Thanks..

I mean on financial services, double digit growth is I mean this quarter when we look at the growth this year the growth was quite well balanced. So when I look at this I would say things are going well. We have growth in outsourcing, good growth in consulting back again in financial services.

And going pretty well across the board so I do not see anything specific in financial services and this last two quarters we’ve been driving good growth with that vertical and we feel good about it including and I am taking the opportunity as I mentioned in my presentation we have our second client joining Accenture post trade servicing the unique capability in BPO where we are providing post trade services [indiscernible] we have our second client.

So I think our new services are getting even more traction..

Our next question is from the line of Dan Perlin with RBC Capital Markets..

Thanks. Good morning so I have just a couple quick ones.

Your business now is 20% or more in digital and cloud based solutions and I am just wondering more specifically when we think about the types of revenue that you're recognizing within that, is that really what’s driving your visibility and improved trajectory and then ultimately kind of the margin trajectory are we seeing at the operating line or is there something else and it also seems as though that business is now bigger than your legacy ERP and I am wondering if that’s giving you better visibility to the future.

Thanks..

When you look at our drivers for growth and related to the presentation we made in the IA day, we had two plus one, clearly digital related services are a business where we invested significantly as you saw seven years and when we are getting a very significant return.

As we mentioned our digital related services are in the range of the $5 billion and indeed are growing in excess of 20%. So indeed it is an engine for growth. This is what that was supposed to be.

We invested a lot organic or through some very targeted acquisitions as you remember the [indiscernible] equity, the avVenta, more recently i4C or this acquisition we made in Australia with a Reactive Media and we will continue to do so. And indeed it is for us very important investment source of growth because this is where the market is turning to.

I mean the second big engine for growth is what we characterize as everything related to rationalization of the operation for our clients which is resonating very well with our business in operations. And no surprise our business in operations, this business is growing double digit growth, so in access of 10%.

And here you have two clear engines for growth, very sustainable, very strong and again when I look at operations it’s not by surprise we invested heavily in some acquisition and if you take procurement [every about] [ph] few years ago and more recently procurement.

And the third one when I said two plus one because this one is more lumpy, as David would say is around the large scale transformation programs. So every year we have a number of large scale transactions because this is the specialty of Accenture and we benefit from these three engines for growth.

So we will continue moving forward to invest both in digital and both in our rationalization capability to do well especially around the applications how we see growing double digit and operations growing double digit and we will continue having our large scale transformation programs..

The other thing I just wanted to touch on. You mentioned that the ERP is kind of an opportunity you’re coming back and I wanted to make sure there was a clarification point.

Are you talking about your partnerships now with cloud based ERP implementation or just legacy ERP and then if it’s legacy, can you just talk a little about what’s the nature behind that now? Would you think that would be shifting away from that? Thanks..

Both. We are extremely pleased with the traction we are getting and if I had to mention one, we are already leading on HANA implementation with SAP on a global basis. So the new ERP HANA based solution cloud enable and we already the number one in implementing the solution to marketplace that we see as well.

The more classic legacy ERP to support the global expansion on very large clients and I have in mind two or three recent situations where we’ve been winning some very significant ERP in finance and accounting, in supply chain to support the transformation and the expansion of leading global groups.

And for these groups you need the more classic I would say backbone that might around [the record] [ph], that might be around SAP or that might be around Microsoft. And we see a few coming yet back again and as we speak at least I have three illustration in mind coming in Europe for very large global group and very large ERP.

So we’re pleased with that business. Of course the digital related services are high per growth, are driving the growth and this is where we are investing. But we are pleased with where we are with our ERP business which has been stabilizing this last quarters..

Our next question is from Jason Kupferberg with Jefferies. Please go ahead. .

So maybe just two finally put the gross margin questions to back. I think all that extra color around the different buckets of cost on the COGS lines was very helpful.

But given that there are these other buckets of cost outside of underlying core contract profitability, are you basically telling us that the trend of year-over-year decline in gross margin will probably continue because of pressure from those other areas? Or do you think that we’re closer to sort of a stabilization point in terms of year-over-year trend in gross margin.

And the reason I ask and again I appreciate the focus on operating margin but just so that we get the models kind of tuned right and may mitigate the need for other questions like this in the future..

I think and by the way I appreciate these questions because I know what you’re trying to do in connecting the dots. I mean what I would say is that I am not going to comment specifically on gross margin guidance, because we really got to operating margin.

But what I’ll say is that if you look at contract profitability as a factor, we are forever focused on improving our contract profitability over time. And that will be an objective for the remainder of this year just as it hits an objective every year.

And so we’re always focused in challenging our teams to improve the profitability of the portfolio of contracts that we’re doing in our business.

The other thing when you said would be a headwind or would be a drag, again some of these things are investments and we wouldn’t view that as a negative thing if it’s in the context of expanding operating margin.

And so I am not suggesting that we just completely ignore, we do look at the functional areas within our GAAP P&L but what we’re really managing to as operating margin and if we’re expanding contract profitability, let’s say investing more or rewarding our people more or whatever the element maybe in gross margin and at the same time expanding operating margin.

That’s all by design. We’re not solving to expand gross margin, we’re solving to expand operating margin and fundamentally underneath that we are focused on improving the profitability of the work we do with clients and then we’re also solving for investing more in our business and in the context of those things driving operating margin expansion.

If we do that, that’s what’s most important..

And just a shift to the topline which was obviously really strong here and you did talk about the increased visibility leading to the uptick and the guidance range. So I know in the past you had given some actual percentages in terms of the percent of your revenue target for the full year that’s actually under contract.

And I was just wondering if you could give us where you stand on that percentage now versus maybe where you were a year ago..

We really got away from giving that number because it was one that we found was creating more confusion than it was helpful. So I won’t give a specific number but I’ll just characterize that we have a very good position with our contracted revenues. And they are very well positioned relative to the revenue guidance range; let me put it that way.

And again as we have been focused more and more on our annual contract value that certainly gives us better contracted revenue visibility in the fiscal year..

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

Our final question today will come from the line of Bryan Keane with Deutsche Bank. Please go ahead..

So in the quarter the 10% constant currency revenue growth was a few points above the guided range. And for the past few years we’ve didn’t see Accenture really beat its current quarter range much.

So I guess what would you point to that cause the upside surprise in the given quarter?.

Look, truthfully it was broad based; I think that it wasn’t one thing. It was really better performance across our five operating groups than what we had assumed even what we had assumed when we provided the guidance as we were working to be at the upper end. And I think as Pierre said, digital the level of growth in digital is just extremely strong.

We had assumed it would be strong, it’s very strong digital, operations, app services, those are all drivers and we saw elements of that across all five operating groups. And really you could say across all three areas. So it was broad based. .

But you know it's one close that for me is standing apart and which is probably over achieving and even taking out by surprise and this is good news is all about digital related services.

This is a way we decided to ride, there is a strong trend we want to take leader position, we like Accenture Digital, we are now evaluated by the Governor at the largest and the number one organization providing digital related services.

And in excess of 20% growth, it has probably taken us a little bit by surprise and this is a kind of surprise we love..

And then just on the pricing front. I think it was three quarters ago you kind of put a scare through the market talking about pricing pressure and application work. It doesn’t really seem to be -- I can’t see in the numbers.

So can you just comment that on that and then just lastly as a bonus question since some last resources, so what are you expecting? Do you expect that vertical to get weaker in your guidance or do you expect it to maintain its growth? Thanks so much..

Let me just work backwards, on resources our Chief Executive of the Resources is still very much focused on driving growth for the year and we’ve made a lot of progress and we should acknowledge that team’s efforts and what they’ve done to position the business going forward. So that continues to be our goal.

But yet we have a close eye, very close eye, on energy obviously. What was the other question? On pricing, pricing is stable. We’ve actually been pleased with -- I think I can say we’ve been pleased with the pricing trends in the recent few quarters. I am just going to characterize it as stable with some strength in certain areas of our business.

But overall, stable. But obviously in an environment that continues to be very-very competitive..

Thank you. Thanks a lot for the good question and thanks David as well. So, thanks again for joining us on today’s call. With the first quarter behind us and given the very strong momentum in our business, I feel confident about our ability to deliver our revised business outlook.

Moving forward, we will continue to look at opportunities to invest in differentiated capabilities, to position Accenture for growth and success in the marketplace and continue gaining market share. I want to wish everyone on today’s call a very happy holiday season and best wishes for the New Year.

We look forward to talking with you again next quarter. In the meantime, if you have any questions please feel free to call KC. All the best. Happy holiday..

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