Accenture plc (ACN) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Accenture's First Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are 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, this conference is being recorded. I would now like to turn the conference over to your host, Managing Director, Head of Investor Relations, KC McClure. Please go ahead.

Thank you, Greg, and thanks everyone for joining us today on our first quarter fiscal 2017 earnings announcement. As Greg just mentioned, I'm 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 for 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 2017. We will then take your questions before Pierre provide a wrap up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we’ll discuss on this call, including our business outlook are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's News Release and discussed in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures where appropriate to GAAP in our News Release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now let me turn the call over to Pierre.

Thank you, KC, and thanks everyone for joining us today. We are very pleased with our results for the first quarter. We grew revenues ahead of the market gaining significant market share and I’m particularly pleased that our gross continues to be broad based across the dimensions of our business including very strong double-digit growth in new high growth areas such as digital, cloud and security-related services. Here are a few highlights for the quarter. We delivered strong new bookings of $8.3 billion. We generated revenues of $8.5 billion with 7% growth in local currency. We delivered very strong earnings per share of $1.58, a 23% increase. We expended operating margin 40 basis points to 15.6%. We generated strong free cash flow of $1 billion and we returned nearly $1.4 billion in cash to shareholders through share repurchases and dividends. So, we are off to a strong start in fiscal year '17. I feel very good about our business and the speed at which we are executing our strategy to drive differentiation for Accenture and accelerate our rotation to The New. Now let me hand over to David who will review the numbers in greater detail. David, over to you.

Thank you, Pierre, happy holidays to all of you and thanks for taking the time to join us on today's call. As you heard in Pierre's comments, we were very pleased with our results in the first quarter which came in as expected and represent a positive first step to achieving our full-year objectives. Our focused execution of our strategy continues to extend our leadership position in the marketplace and strengthen our ability to deliver significant value to our clients and our shareholders. Once again we delivered on all three of our financial imperatives to driving shareholder value. I’m particularly pleased with the continued progress we're making in expanding our operating margin while investing significantly in our business and our people. Our ongoing focus on our fit-for-purpose agenda is serving us well as we seek to optimize the economics across each of our five businesses. So before I get into the details, let's look at our results in the context of the three imperatives. Strong local currency growth of 7% continues to support our strategic objective to grow faster than the market and take share. We delivered positive growth in the majority of our industry groups in geographic markets with five industry groups growing double digits. Strong momentum in The New continued to be the drop of our growth. With respect to sustainable margin expansion, we exceeded operating margin - we expanded operating margin about 40 basis points while continuing to make significant investments to build scale and differentiation in strategic and high-growth areas of our business. And finally regarding strong cash flow and disciplined capital allocation, we generated $1 billion in free cash flow in the quarter which supported our ongoing objective of investing in our business while returning significant cash to our shareholders. As it relates to our capital investments, we invested roughly 600 million primarily attributed to 10 acquisitions and we are well-positioned to invest at least $1 billion to acquire critical capabilities this year especially in The New. With that said, let me turn to some of the details starting with new bookings. New bookings were $8.3 billion for the quarter, consulting bookings were $4.9 billion with a book-to-bill of 1.1 and outsourcing bookings were $3.4 billion with a book-to-bill of 0.9. Our new bookings came in the range we expected this quarter and represented 9% growth in local currency. This level of new bookings follows our typical pattern of lower new bookings in the first quarter which then build throughout the year. We are very pleased with our estimated bookings in strategy and consulting services combined and of course digital cloud and security-related services continue to be an important theme in the work we're contracting with our clients. Looking forward we feel good about our pipeline and we expect to deliver strong bookings in quarter two. Turning now to revenues. Net revenues for the quarter were $8.5 billion, a 6% increase in USD and 7% local currency reflecting a foreign exchange headwind of roughly 1% compared to the flat impact provided in our business outlook last quarter. Adjusting for the actual FX impact, we were at the upper end of our guided range for the quarter. Consulting revenues for the quarter were $4.6 billion up 6% in USD and 7% in local currency. Our outsourcing revenues were $3.9 billion, up 7% in USD and 7% in local currency. Looking broadly at the trends and estimated revenue growth across our five business dimensions, growth was led by operations which posted double-digit growth for the fourth consecutive quarter. Strategy and consulting services combined, as well as application services delivered mid-single-digit growth. And across those four businesses, we saw strong double-digit growth in The New with all three components digital, cloud and security going double digit as well. Taking a closer look at our operating groups, products our largest operating group led with 17% growth reflecting continued double-digit growth across all industries and geographies. Our significant growth in products reflects the rapid adoption of digital cloud and security-based solutions across all products industries. Financial services grew 6% in the quarter with overall positive growth in both insurance and banking and capital markets primarily driven by very strong growth in Europe. We did see contraction in banking and capital markets in North America but expect to return to positive growth during this fiscal year. H&PS came in as expected at 5% growth with balance growth across health and public services globally and strong double-digit growth in the growth markets. Communications, media and technology grew 4% and reflected strong overall growth in both North America and the growth markets. We saw strong double-digit growth in media and entertainment and solid growth in electronics and high-tech. We continue to see contraction in Europe driven primarily by communications. Finally, resources revenues decreased 2% in the quarter driven by continued challenging market conditions in both energy and chemicals and natural resources, especially in North America. The bright spot continues to be utilities which again delivered double-digit growth in the quarter but not at the level required to offset the pressure in the other two industries. We expect our resources operating group to continue to navigate a challenging environment throughout this fiscal year but remain very focused on delivering flat to slightly positive growth for the full year. Moving down the income statement. Gross margin for the quarter was 32.1% compared to 32% in the same period last year. Sales and marketing expense for the quarter was 10.4% compared with 10.9% for the first quarter last year. General and administrative expense was 6% compared to 5.8% for the same period - the same quarter last year. Our operating income was $1.3 billion in the first quarter reflecting a 15.6% operating margin up 40 basis points compared with quarter one last year. Our effective tax rate for the quarter was 20.4% compared with an effective tax rate of 29.3% for the first quarter last year. The lower effective tax rate was primarily due to higher benefits from adjustments to prior-year taxes, as well as our early adoption of the new accounting standard on employee share-based payments. Net income was $1.1 billion for the first quarter compared with net income of $869 million for the same quarter last year. Our diluted earnings per share were $1.58 compared with EPS of $1.28 in the first quarter last year and this reflects a 23% year-over-year increase. Day services outstanding were 44 days compared to 39 days last quarter and 41 days in the first quarter of last year. Free cash flow for the quarter was $1 billion resulting from cash generated by operating activities of 1.1 billion, net of property and equipment additions of $85 million. Our cash balance as of November 30 was $4.1 billion compared with $4.9 billion at August 31. With regards to our ongoing objective to return cash to shareholders, in the first quarter we repurchased or redeemed 5 million shares for $588 million at an average price of $116.44 per share. In November 30 we had approximately $4.9 billion of share repurchase authority remaining. Also in November we paid a semiannual cash dividend of $1.21 per share for a total of $785 million. This represented an $0.11 per share or 10% increase over the dividend we paid in May. So in summary, we're very pleased with our quarter one results and we're off to a good start in fiscal '17. Now let me turn it back to Pierre.

Thank you, David. Our very strong first quarter results demonstrate as we continue to execute a strategy that is resonating very well with our clients and driving differentiation for Accenture in the marketplace. We continue to make significant investments to rotate our business to the new digital, cloud and security-related services which together now account for more than 40% of our total revenues and again this quarter grew at a very strong double-digit rate. The need to go digital continues to drive strong demand from our clients around the world. We're working with NG the multi-national utility to transform its retail business model by completely rethinking the customer experience. We are leveraging the service design and innovation of Fjord, part of Accenture and [tech] [ph] team to help NG create new services to disrupt the market. With Hess, the global energy company, we're implementing a cloud based as of service operating model. We have cloud solutions and productive analytics, hence is able to increase efficiency and improve maintenance across its asset base while benefiting from consumption based pricing and we're working with one of the Europe's largest home improvement retailers to create an impairment, a new multi channel strategy to accelerate digital transformation. Our retail experience at Javelin, part of Accenture strategy and our designers at Fjord are helping shape and deliver a more personalized customer experience. We continue to invest across the business to accelerate our rotation to The New both organically and through acquisition and in the first quarter with the price $600 million in strategic acquisition. In digital, we are acquiring OCTO Technology, a leading digital consulting firm based in Paris. We also acquired Karmarama, a creative agency in the U.K. and Allen International, a design consultancy that specializes in banking. In cloud, we acquire DayNine, a leading Workday consulting and services provider and Nashco Consulting which expands our capabilities in service now. In security, we are quite different from security enhancing our cyber security capabilities for U.S. federal agencies and we completed the acquisition of Redcore in Australia. We also further strengthened the capability of Accenture's strategy with the acquisition of Kurt Salmon which brings deep expertise in the retail industry. At the same time, we continue to leverage our unique position in the technology ecosystem. Our clients value our independence as the leading partner of both the established providers and emerging players. With Google, we formed a new alliance to create industry specific cloud and mobile solutions to help clients advance their digital transformation agendas and improve business performance. We expanded our sales force capabilities to include new platform for financial services, consumer good and life sciences companies, and we now have significantly more people skilled in sales force than any other provider. We are always looking ahead to anticipate what next, and our unique innovation architecture enables us to take an innovation led approach to help our clients invent the future. A key element is Accenture Ventures which includes a robust open innovation program that works with start-ups, accelerators and entrepreneurs and we recently formed a strategic relationship with Partech Ventures, a leading venture capital firm to help clients tap into the rich pool of innovation from start-ups in Europe and Silicon Valley. Turning to the geographic dimension of our business. We continue to grow ahead of the market in each of our geographic region. In North America we grew revenues 6% in local currency driven by strong double-digit growth in several key industries including consumer goods, retail and travel services, life sciences and media and entertainment. In Europe we had another strong quarter with 7% growth in local currency driven by double-digit growth in several of our major markets including the U.K., Germany and Switzerland, as well as high single-digit growth in Spain. And in gross markets we are very pleased with our 10% growth in local currency led by strong double-digit growth in Japan and China. In closing, our rotation to The New is clearly at the heart of our strategy to position Accenture for future growth. The strong capabilities we are building are only recognized by our clients but also by many prominent industry analysts. And I'm proud of the recognition we have received for the relevance and depths of our services ranging from the strength of our overall position in digital services towards specific strategy in analytics, cloud and digital experience to our leadership in emerging technologies like Intelligent Automation, Internet-of-Things and blockchain. So with the first quarter behind us, I'm pleased with our results and especially with the balance we are striking between delivering results today like continuing to invest to drive future growth. With that, I will turn the call over to David to provide updated business outlook. David, over to you again.

Thank you, Pierre. Let me now turn to our business outlook. For the second quarter fiscal '17 we expect revenues to be in the range of $8.15 to $8.4 billion. This assumes the impact of FX will be negative 2% compared to the second quarter of fiscal '16 and this range 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 now 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 continue to expect our net revenue to be in a range of 5% to 8% growth in local currency over fiscal '16. For operating margin 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 to be in the range of 22% to 24%. For earnings per share adjusting for the updated FX assumption, we now expect full year diluted EPS for fiscal '17 to be in the range of $5.64 to $5.87 or 6% 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. Finally 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. With that let's open it up so 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. Greg, would you provide instructions for those in the call, please?

[Operator Instructions] Your first question comes from the line of Tien-Tsin Huang from JPMorgan. Please go ahead.

Hi, good morning. Just the - I guess, second quarter in a row here, not beating revenue guidance. Maybe where are you seeing change in business momentum? Looks like strategy, consulting in North America has slowed a little bit. Can you comment there? What, any big changes dramatically in terms of just business momentum? Thank you.

Well again I’ll just comment on how we feel about the revenue and then Pierre will chime in with some additional colors as well. I mean let me start Tien-Tsin with the fact that when we provide guidance, we provide it because we expect we’re going to land in that range and as pleased as we've been in the past where we've exceeded the range that hasn't been our intent. We don't set guidance with the expectation that we’re going to beat it. So having said that, in that context again we're very pleased with 7% growth and there's really two reasons - I would say three reasons underneath that, one is that that growth does reflect we believe significantly higher growth in the market. And when you look at what that means in dollar terms, when you look at the dollar share gains that we've taken underneath that 7% growth, it's tremendous. The second we're pleased with the 7% growth is because when you pill underneath the five operating groups and look at it across the 13 industries and the 20 some odd geographic markets that we operate around, in around the world, the vast majority of those had positive growth and in many cases double-digit growth. So if you look at our 13 industries, five of the 13 had double-digit growth and of course the third reason, we're pleased with the growth is because of the continued very strong growth in The New. And so we feel very good about the growth to be clear. We did signal previously that we - that we had some areas in our business that were more challenged. We talked about chemicals and natural resources and energy for some time now, and I would say that quarter one for the most part was more of the same maybe a little bit more pressure in North America in the first quarter. We signaled last quarter that we had a period of lower growth that we were going to be going through in Communications Europe and that played out as expected. And then, I did mention banking and capital markets in North America, which is more attributed to our revenue pattern on a few large clients in the quarter with the expectation that will return to positive growth but even in banking and capital markets, if you look globally, we had very good growth and in Europe in banking and capital markets, we had double-digit growth. So our guidance assumed that growth rates in many of our areas of our business would be lower and that's what's played out. I'm sorry for that long answer but Pierre, see if you want to add anything.

No, I mean not much to add on this. I get to answer - I mean very directly your question, do we see any change in the marketplace, my simple answer is no. I think we do not see any new trends, new situations as David said, very well. We have some very specific situations but otherwise again our growth is broad based across the different countries, different industries. So the different dimension of the business and I mean for us the name of the game is to be in the guidance. So probably we set some, some sort of track record of beating the guidance. But that's not the intent, the intent is to deliver in the guidance and to provide you with the right information on how we see the business.

Understood. No, that's helpful. You did signal those items. Maybe my quick follow-up, just the updated thinking on outsourcing versus consulting growth in fiscal 2017? And thanks for the time, guys.

Okay. Thank you, Tien-Tsin. If you look at the full year, our view has not changed for consulting as a type of work and outsourcing as a type of work. Last quarter, and this is true today. Our view was high-single digits for consulting and mid to high-single digits for outsourcing and that is unchanged from 90 days ago.

Your next question comes from the line of James Friedman from Susquehanna. Please go ahead.

Hi, good morning. It's Jamie at Susquehanna. Wanted to ask a quick question about the operating margin trajectory. David, I noticed that the products OG operating margin expanded about 300 basis points to 18%. If you could share whether that's sustainable, and what some of the inputs are that are pushing that margin so high?

Yes, if you look at products specifically, they are doing quite well, both in terms of the topline growth and the profitability. There is no doubt about it. When you look at their expansion in margin, I think the high level, I think that's a reflection of two things, number one is I think it's a really good illustration of the power of executing the strategy. So what you're seeing in products is a high level of rotation to the new. You see a strong component of consulting and strategy services combined, it's a very much operating kind of at the heart of the industry in the client agenda. And I think what you see in their profitability is a reflection of that, it's the power of being able to really bring to the fullest extent our business architecture around five businesses rotating into new with very, very deep industry expertise that's what the play there. As part of that, they also are more efficient just as a tactical point in sales and marketing costs. So overall, we were pleased with our profitability. We were pleased with our contract profitability, we are pleased with our payroll cost structure overall, and as I've said before, when our payroll is efficient and our contract profitability is good and good things happen and of course in the mix we continue to invest significantly in the business at the same time.

Yes, and just as my follow-up, more generally, how should we contemplate the margin characteristics of the New versus the rest? We would think that the New you would have higher bill rates but would also have higher pay rates. So any inputs that you might have there would be helpful?

Yes, I would say that on its - our intent is that so let me talk about intent as opposed to be clear, I’m not commenting on specifically the quarter but our intent is that our profitability profile in The New would be accretive to Accenture. And there is obvious reasons for that number one is, you're talking about - you're talking about a new and emerging high impact, high value marketplace where there is a scarcity of skilled partners who can do what we do at scale. And so those market conditions typically lend themselves to the opportunity for good economics and so that's how we look at the new and that's our focus.

Thank you.

Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead.

Hi. Can you talk a little about the maturity of the service lines in digital, and -- because you guys probably have the best broad-based visibility into the evolution of that market? So specifically how is the mix evolving from the earlier stage, shorter duration, kind of concept and design work into full scaling and rollout, and how do you see that changing in your pipeline as you look forward?

Yes sure. Thanks a lot Lisa for your question. What we believe is on one hand it feel certainly early days of these digital transformation. Now as you're saying we're starting to see some more maturity in the way our clients are buying services. So we have moved from the very early days of small project to prototype proof-of-concepts testing the water with digital to try to understand what are the new business models. I think this wave at least for the B2C, for the B2C is behind us, for the business-to-consumer is behind us and now the business-to-consumer digital related services are maturing more rapidly driving bigger transformation projects. Now if you move to more the B2B related to Internet-of-Things or industrial Internet, we still in wave one where indeed, we're working more around prototyping the future, finding user cases for the smartglasses for the analytics and for the drones and all of that you like and so the maturity probably will come in the next 12 months. So I still see a bit of a difference between the B2C and the B2B and accordingly if you look at Accenture, we have been scaling to leadership our services probably from a B2C standpoint I’m thinking of course about the better great success of Accenture in active, where now we’re in the leading position, I'm thinking as well of all what we're developing in ecommerce kind of services or analytics supporting as well as business-to-consumer. And at the same time we are investing and scaling our services more on the B2B, especially around Internet-of-Things, the industrial Internet and other type of services artificial intelligence, as well.

Terrific, and thank you. And then, as my follow-up, can you comment on Accenture's perspective on the policy debate around H-1B visas. Clearly, you're not in the cross-hairs of that, but you are in the top five I think, H-1B visa users, so curious for your perspective on that?

You know I don't think that this is really the forum for us to elaborate on our view on that typically we wouldn't comment on policy matters like that. What I would say is that, you know from our perspective, we have a very strong robot workforce in the United States. We have - I think I'm correct 50,000 employees in the United States and the vast majority of those are U.S. citizens or permanent residents. And so our model - so I can speak for Accenture our model is to build resident skills if you will in all of the major markets where we operate and again the U.S. is a reflection of that. So speculating I don't think serves the - really would make sense at this point terms of where it might go beyond and it would be tough to predict.

Thank you. Happy holidays guys.

Your next question comes from the line of Bryan Bergin, Cowen. Please go ahead.

Hi. Can you make some comments around the outlook for clients' 2017 budgets, and then, how do you characterize that now versus this time last year?

Clients 2017 budgets versus last year…

Yes, so their outlook, and what you're seeing in their behavior to start?

Yes, we are working carefully especially as we're getting at the back end of calendar '16 what's happening in 2017. First, we look at it from different angle, of course our experience with clients, what we see from the analyst - industry analyst and then making our judgments. First we could confirm that indeed we see the rotation of the budget from legacy technology services to digital related services and currently it's playing in our favor. No doubt that we continue to see that shift in the budget of our clients. Interestingly, the overall budget including digital is probably increasing more than decreasing because you have the budget coming from for instance digital advertising and digital marketing now are becoming part of the addressable market for companies like us. So our rotation to digital cloud and security has opened new opportunities for us and it's confirmed by the industry analyst who are all mentioning the shift from legacy technology to digital related services. For the rest I guess as mentioned by David we're pleased with our pipeline. We have good prospect for the second quarter booking. So all of this is confirming to me that the demand is still there but again more and more driven by what we call The New and new services around digital in contrast to the legacy services.

Okay, thanks. And then, just my follow-up, the operations group business performance has obviously been solid. Can you talk about, I guess, the split across the different business mix there, particularly how the BPO business is doing across verticals? Thanks.

The anchor of our operations business and therefore the strength is really our BPO business which is a world-class industry-leading and the drivers of - our growth have been - remain pretty consistent. When you look at F&A, when you look at procurement those are two of the primary anchors and always behind the results and operations in BPO in any given quarter, so it's BPO centric and we are very pleased with our results in the first quarter and I would say it's more - it's really more of same - of the story we've been telling now for many quarters.

Thanks guys.

And as you're calling BPO, and I would like to take the opportunity to congratulate Debra Polishook and all the team and management overall, who have been doing an extraordinary job for Accenture and to some extent since you have idea I would like to rename and to rebrand BPO because I think it's more of the terminology of the path and what we’re doing is moving beyond what we used to call business process outsourcing because what's done by Debbie and the team is a profound of the way you're operating that business by bringing now platform-based services at scale highly efficient and highly intelligent. Second, more and more providing that business as a service, which is of course contributing to support the agenda of our clients where they move - they want to move from fixed to variable and CapEx to OpEx. Three, it's going beyond managing operations that is bringing analytics, cloud services, amazing richness in what they do and I truly believe tribute to the team that they have been reinventing the kind of services and that is why we're growing 10% which is much more than the BPO business and gaining significant market share. I mean the line is always the same, the appetite from clients is for new technologies, new services, new ways of operating the business and this is all the rotation we're engaged in Accenture's last three years, we are benefiting now and hopefully in the coming years to move us away from the legacy commoditizing services.

Your next question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead.

Good morning, guys. Thank you for doing the call, I guess, a day early. So in that spirit, happy holidays. I just wanted to - I know, David, you mentioned - this is perhaps not the right forum for policy views, but with regards to a lot of the political change that we are seeing, could you potentially go into sort of the demand implications of a Trump presidency, especially as it relates to changes in regulation in healthcare and banking?

Yes Ashwin, I know that that is the topic of the day and everyone is interested in trying to speculate and anticipate what Trump Presidency may bring but again, I just don't - we're just not going to speculate on that. I mean time will tell. It's frankly it's impossible to tell right now and anybody tells you that they have an informed view of it is, it was probably misleading you. So, we'll see. I think if you put Trump aside, there's a lot of good things that are underpinning the U.S. economy right now, certainly some challenges as well but when we look at it through our lends of our business, we feel good about our market in the United States and our growth prospects in the United States. And we have not identified, anything that we believe is going to materially change that for the fiscal year that, that we're in.

Understood.

I think on this - and commenting of course on the new or the coming presidency, talking about Accenture and what it is we were achieving. First we know, we are in the world, which is highly volatile, uncertain almost every day something might happen around the world that could be many elections every year, in '17 we will have elections in France my country, there is going to be election in Germany and so on and so on. So what it is going to achieve is to build a durable business model. We add scale and relevant services which at the end of the day should be as much as we could independent of any form of short-term political effect or older effect and I think this is what we demonstrated this last, if you look 15, future of 15, future of 16. We've begun to grow double-digits, here we have a very strong 7% in Q1, despite the environment. So the environment is the environment that not much we could do and so for us our strategy is to take our future in our hands and drive a strategy which is going to be sustainable and durable and I believe that nothing going to stop us from executing our strategy and make Accenture successful.

Right. And for the follow-up question, I know you mentioned obviously, the tax rate impact in the quarter. A part of the benefit is -- was comping standards. So just want to check, is that a one-time true-up, or should we expect from a modeling perspective, a lower level?

Yes, if you remember last quarter when I signaled that we were going to adopt the new accounting standard, I signaled that it had about a two point impact on our tax rate and so it was in the mix we're not quantifying the impact in quarter one, but it was in the mix this quarter. We don't have a materially - we don't have a different view from what I commented on 90 days ago. I will say that as I said last quarter I believe, is that the ultimate impact depends on what happens to the stock price is the way the accounting works and so if the stock price appreciates between when a grant is issued and versus when it's awarded, then that creates a tax benefit if the stock price goes down between the issuance and the date that it's awarded, while the award date and the date that you get the share, then it would create a tax headwind or would have a negatively impact tax rate. And so it to be clear, it will depend in the future on what happens to the stock price and you're looking at the difference between when it was granted and when they actually get - it’s vested and they get the award.

Understood. Thank you, guys.

Your next question comes from the line of Frank Atkins from SunTrust. Please go ahead.

Thanks for taking my question. Lisa asked a little bit about sales and marketing expense, a significant driver of margin in the quarter, where could we see that going looking forward?

Yes, I mean I would say sales and marketing expense - first of all it does ebb and flow by quarter. It's driven by you know - obviously it's an activity driven cost depending on opportunity pursuits closing deals et cetera. So it does vary by quarter. Having said that, in our fit-for-purpose agenda that we're driving as a multiyear effort to optimize our economics to create capacity in our P&L both to meet our margin expansion goals, to drop our share price but to also importantly create significant headroom in our P&L to invest in our business that is all in the mix of our fit-for-purpose agenda and this is one example of the power of the focus that we have on increasingly managing each of these businesses and optimizing the economics for each business individually and that includes optimizing sales and marketing costs for each of the businesses individually recognizing that the way you approach sales and marketing in a strategy practice is fundamentally different than the way you do it in an operations practice. And so we continue to focus on optimization across all of our business activities in our entire cost structure of which sales and marketing is a key component of that. So we'll see how it goes. It does vary by quarter but we're pleased with the efficiency of our cost overall in the first quarter certainly with the 40 basis points of expansion.

And then, for my follow-up, as we kind of step back and look at the 10 to 30 bps and target expansion over time, if we were just to take the mid-point, the 20 bps of margin improvement, how do you see that breaking down in terms of either gross margin, or efficiency gains or changes in G&A, or sales and marketing? What are the kind of buckets driving that?

I'm not going to break it down that way because that's really not the way we manage our business as we've said. What I would say is that the two biggest influencing factors to margin expansion are one payroll efficiency. So if we expand margins over time that almost certainly means that we are increasingly driving a better relationship between payroll cost and revenue. And the second big contributing factor is our client or contract profitability and those are the two factors and so it would be reasonable to assume that to the extent we have an expectation or ambition to expand operating margin over time both of those things are contributors.

Thank you very much.

Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead.

Good morning, thanks for taking the question and happy holidays. Wanted to ask a little bit about M&A. Unfortunately, you guys are buying all of our best software channel checks. As you build that business, and maybe you're more integrated with [Agile] [ph] processes and integrators in certain cloud segments, whether it's specific to Now Workday or salesforce.com or regionally. Along with Pierre's comments of building a more durable business, how much more visibility are you gaining in the New, relative to your historical model, how much visibility do you have, whether it's consulting or ongoing application development, maintenance business, because of that shift in your business?

I mean there is a shift in the nature of the services revenue. Now the services would apply in consulting, in strategy, consulting, system integration and solution implementation, outsourcing and the like. So they are all very similar in the nature of the business of what we've been doing for many years, now it's the nature of the services which are of course different because they are in digital all software and new cloud. But the software and the cloud at the end of the day is an application that you have to implement and we know how to do that. So I don't believe that the shift in our rotation to the newest changing the visibility on the business or changing the fundamentals of our business - fundamentally changing the nature of the services we’re providing in digital marketing, in cloud, in security services and so forth. But I don't think it is changing the visibility or it has a profound impact on the business model.

Is that the case, if -- as you shift the model has shifted more towards consulting than outsourcing. Is that the case from an overall mix perspective, in terms of -- as you partner with your clients for Agile development, and you have centers of excellence to work alongside them, does that give you more visibility on the consulting side?

I mean certainly. You've seen the result this last few quarters around our consulting business which has been the significantly moving up and are close to digital has been a driving force on these consulting roles. But when you look at it you chill out the same continuum with clients starting with strategy and here more digital strategies and corporate strategies from the past, then you need to create operating models, digital operating model for clients and you need to own this very well in the industry drivers and disruptions to all of what we're calling Accenture Consulting, then you build solution and this is the job of Accenture Digital and Accenture Technology and then you operate on behalf of the business if clients want to do that. At the end of the day, that's why we build this business architecture from strategy to building solution to operate on behalf of clients and we are the only one in the marketplace to have this continuum of services because this is what we believe the client is going to buy moving forward and that always is going to be a road for the outsourcing because again you envision the business, you build solutions, and you operate solutions and we want to be a leading company in these three activities if you will. And if you look at digital indeed it's starting more with the strategy and the consulting fees of the business. And there are already many activities we have from an outsourcing standpoint coming in my mind would be cloud where we're managing cloud services on behalf of clients, would be cyber security where a significant part of our cyber security services are managed services. And three, I'm thinking about analytics we are more and more as well driving on behalf of the clients including some marketing campaign. So again, you need to look at it as a continuum of services we're providing to clients. So we are there for whatever they want to execute.

Very helpful. Thank you very much.

Your next question comes from the line of Jason Kupferberg from Jefferies. Please go ahead.

Hi, good morning, David. I just wanted to start with a question on -- I guess, you get the three pressure points in the business right now, the North America banking capital markets, the North America resources, or at least parts of resources in North America, and then European com. So I was just hoping you could maybe give us a sense of in aggregate, how big are those three in terms of percentage of your revenue? And do you feel like individually that they've kind of troughed here in Q1?

Yes. So it's interesting you asked that question, Pierre and I were talking about this just recently, just as we analyze our business. If you look at the few areas where there are some market dynamics that are creating pressure on our business, the areas you called out that represent less than 15% of our revenue, 85% of our business, and I don't mind putting this out in traffic so to speak. The remaining 85% of our business is growing double-digit - it's growing double-digit. So, when you look at 85% of our business, it's really very consistent pattern with what we've seen now for many quarters. We have these few concentrated areas where the market dynamics are such that it has created some challenges in the quarter that we just closed and in some cases to be fair and we called it out in pointing to some of those challenges will extend into future quarters this fiscal year. But I think the point of that and it gets back to the statement that is to why we're so pleased with our business is that the vast majority of our business is really doing quite well and continuing to grow and expand consistent with what we've seen for many quarters.

Yes, and it does speak to the benefits of the diversification you obviously have. Just as a follow-up, I mean, obviously the equity markets have been pretty excited about the US election. But now as we head into January, is there a thought process that some enterprises may hesitate on new project starts and ramp-ups just at the outset of the calendar year, until there is greater clarity on the initial priorities of the new administration, and have you built anything into your guidance to sort of risk-adjust for that?

You might comment on your risk adjustment or things like this but…

No, I think we have not seen a change in the U.S. in projects and for me maybe let me tell you what I see. What I think is different with the digital transformation of the industries the way we look at it is and I don't want to be too emphatic that this being disrupted and being put out of the business is clearly in the mind of all CEOs on the planet including the U.S. There is a very strong feeling and understanding that if you're not changing your business models, if you not shifting this revolution of the new, if you're not adopting fundamentally new way of operating digitally enabled, you could be put out of the business and I think this force of no, I could disappear if I not really changing now and you have all the facts behind this. This driving force for me is the driving forces are more significant than any Presidential Election. When you fear about your future as a company, when you fear you can be put out of the business. I don't think you're going to stop your transformation because there is an election. And at least if myself leading the Company as CEO believe me, I would not change my transformation agenda because there is going to be a French Election.

Thanks. Very helpful.

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

Okay. That question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead.

Good morning, guys. Thanks for fitting me in. Just want to ask about consulting. Consulting had been healthy double-digit growth last fiscal year, I think it was 14% constant currency in 3Q, and then 13% in 4Q. It dropped a little bit down to 7%. So just in particular, curious to see what's happening in consulting? And then, you also said, David, that you expect it to be high single-digits for the year. So that would suggest a little bit of a rebound going forward in consulting, so be interested in your thoughts there?

Yes, so let me just kind of deal little fact connect in just for a second so, Bryan, the comment earlier when I answered it that was for consulting type of work where I said high single and so when we talk about consulting type work and relate that to our five businesses, that includes Accenture strategy, Accenture consulting and the application development part of application services. So when you look at those three areas which roll into consulting type of work, the high-single digit is the - is our view. When you look at strategy and consulting combined and now I’m talking about the businesses, two of the five businesses that grew mid-single digits in the first quarter which was right in the range we'd expected. On the last quarter's call, I believe I’ve stated that the growth for consulting and strategy consulting and bond for the year would be mid-to high-single digits and so, we're pretty much in that range. Again, we are very pleased with our consulting bookings in the quarter and that goes across strategy and consulting and bond and the app development part of app services and typically bookings lead to revenue growth. So, hopefully that clarifies but the bottom-line is from business standpoint, we see a lot of demand drivers including back to digital and the newest peers alluded to a couple of times that really serve us well in our strategy and consulting business and so it's a very active marketplace at this point in time.

Okay, helpful. And then, a lot of questions in the industry around pricing, both in consulting and outsourcing, so we'd love to get your thoughts on, are you seeing pockets of pricing pressure versus pricing power throughout the business? Thanks so much, and happy holidays.

Thank you. Same to you. We have been very pleased with our pricing. I would say for the most part we - we again very pleased with our pricing results. The one area where there is pricing pressure and we've talked about this is that where you have areas that are highly or rapidly commoditizing and you look at application maintenance type services as the primary example, that's where pricing is most intense and most competitive but in that area we're holding on in the context that market. Otherwise, we've been very pleased with our pricing.

Okay. It’s time to wrap up and thanks again to all of you for joining us on today's call. Before we wrap-up, I want to mention that KC McClure, who has been our excellent Head of Investor Relations for the past six years, is moving to another role at Accenture as the Finance Director for our Communication, Media and Technology Operating. Accordingly Angie Park will become our new excellent Head of Investor Relations and Angie has tremendous experience, held many finance roles during more than 20 years at Accenture, so compared to me Angie, you are just a kid with my 37 years. I want of course to take this opportunity to really thank KC for dedication, to deliver value to our shareholders and to our business and to have supported so well David and I as Investor Relations. Thanks a lot KC and I look forward to working now with Angie and I know she will be reaching out to many of you very soon. So we could continue being extremely close and friendly Investor Relations organization for all of you. With that let me wish all of you, investors, analysts and our Accenture people who are listening to the call a very happy holiday season, all the best for the New Year. We look forward to talking with you again next quarter. And in the meantime, if you have any questions please feel free to call now Angie and her team. All the best.

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