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Accenture plc (NYSE:ACN)Q2 Fiscal Year 2019 Earnings Conference CallMarch 28, 2019, 8:00 a.m. ET
Prepared Remarks Questions and Answers Call Participants
Ladies and gentlemen, thank you for standing by. Welcome to the Accenture’s Second Quarter Fiscal 2019 Earnings 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. Should you require assistance during the call, please press *0. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Managing Director and Head of Investor Relations Angie Park. Please go ahead.
Angie Park — Managing Director, Head of Investor Relations
Thank you, Trish, and thanks, everyone, for joining us today on our Second Quarter Fiscal 2019 Earnings Announcement. As Trish just mentioned, I’m Angie Park, Managing Director and Head of Investor Relations. On today’s call, you will hear from David Rowland, our Interim Chief Executive Officer, and KC McClure, 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.
David will begin with an overview of our results. KC will take you through the financial details, including the income statement and balance sheet along with some key operational metrics for the second quarter. David will then provide a brief update on our market positioning before KC provides our business outlook for the third quarter and full fiscal year 2019. We will then take your questions before David provides a wrap-up at the end of the call.
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 our 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 David.
David P. Rowland — Interim Chief Executive Officer
Thank you, Angie, and thanks so much to all of you for joining on today’s call. Before we get into the quarter, I want to take a moment to acknowledge Pierre and how important he was to Accenture throughout his decades-long career and his leadership as Chairman and CEO. From a personal standpoint, it is certainly a different feeling doing an earnings call without him, but as you’ll hear in our comments, I’m confident that Pierre would have been really pleased with all that we accomplished in the second quarter and the first half of fiscal ’19.
With that said, we delivered outstanding results in the second quarter and I want to share some of the highlights. We delivered record new bookings of $11.8 billion. We grew revenues 9% in local currency to $10.5 billion with continued double-digit growth across many parts of the business. We delivered earnings per share of $1.73, a 9% increase on an adjusted basis. Operating margin was 13.3%, an expansion of 20 basis points. Our free cash flow was outstanding at $1.2 billion and we continue to return substantial cash to shareholders through share repurchase and dividends, including $2.7 billion on a year to date basis. Today, we announced a semiannual cash dividend of $1.46 per share, which will bring total dividend payment for the year to $2.92 per share, a 10% increase over last year.
So, with the first half of the year behind us, I feel very good about the broad base strength of our financial results and the momentum we see across the business as we enter the second half. Later, KC will mention that we’re raising key elements of our business outlook and I’m confident in our ability to deliver another strong year.
Now, it gives me great pleasure to hand over to our new CFO, KC McClure, who will review the numbers in greater detail. Over to you, KC.
KC McClure — Chief Financial Officer
Thank you, David. It is both an honor and a privilege to follow in your footsteps and serve as Accenture’s CFO.
Let me start by saying that we were extremely pleased with our overall financial results in the second quarter which were aligned with our expectations and position us very well to achieve our full year financial guidance. Our second quarter results continue to provide strong validation of the relevance of our offerings and capabilities to our clients, and our ability to manage our business in a dynamic environment both to deliver significant value to our clients, our people, and our shareholders.
With that said, let me summarize the highlights in the context of our three financials imperatives. Strong revenue growth of 9% in local currency reflects the consistency and durability of our growth model. We’re being a leader across many dimensions of our market, and this has resulted in a growth level that we estimate at more than 2 times the rate of the market. We had double-digit growth in three of our operative groups and in the Growth Market. Broad base momentum continued with growth in 12 of the 13 industry groups and in each of the components of the new: Digital, cloud, and security. We estimate these grew strong double digits.
Operating margin of 13.3% reflects 20 basis points of expansion both for the quarter and on a year to date basis. This level of margin expansion is driven by strong underlying profitability, which importantly allows us to continue to make significant investments in our people and in our business. And we delivered EPS of $1.73, which represents 9% growth on an adjusted basis compared to last year, even with a headwind of approximately 4%.
And finally, we delivered free cash flow of $1.2 billion in the quarter and $2.2 billion year to date, which puts us on a very strong trajectory to achieve our guidance for the full year. We continue to execute on our strategic capital allocation objective with roughly $2.7 billion returned to shareholders via dividends and share repurchases year to date. And we have made investments of $515 million in acquisitions primarily attributed to 15 transactions in the first half of the year. We continue to expect to invest up to $1.5 billion this fiscal year.
Now, let me turn to some of the details starting with new bookings. New bookings were $11.8 billion for the quarter, a record high, with a book to bill of 1.1. Year to date bookings of $22 billion is aligned to our expectations for the first half of the year. Consulting bookings were $6.7 billion, also a record high, with a book to bill of 1.2. Outsourcing bookings were $5.1 billion with a book to bill of 1.1. We were very pleased with our new bookings which were broad-based and aligned with our strategic areas of focus. They reflect our continued differentiation in the market and the high level of trust our client’s place in us to partner with them in driving critical worth and supporting their strategy to adopt and implement new technologies. The dominant driver of our bookings in the quarter continue to be high demand for digital, cloud, and security-related services, which we estimate represented approximately 65% of our new bookings.
Turning now to revenues. Revenues for the quarter were $10.5 billion, a 5% increase in US dollars and 9% in local currency, above the top end of our previously guided range. Consulting revenues for the quarter were $5.8 billion, up 6% in US dollars and 9% in local currency Outsourcing revenues were $4.7 billion, up 5% in US dollars and 9% in local currency.
Looking at the trends in estimated revenue growth across our business dimensions. Strategy and Consulting services and Technology services both posted strong high single-digit growth. Operations are continuing its trend of double-digit growth. And, as previously mentioned, the New continued to deliver strong double-digit growth.
Taking a closure look at our operating groups. Resources led all operating groups with 22% growth in local currency driven by continued strong double-digit growth across all three industries and all three geographies. Communications, Media, and Technology grew 12% reflecting continued strong double-digit growth in Software and Platforms, which was the primary contributor to overall double-digit growth in North America and the Growth Market and strong growth in Europe. The product, our largest operating group, delivered its 15th consecutive quarter of double-digit growth at 10%. Demand continued to broad-based across all three industries and all three geographies. H&PS grew 3% driven by solid growth in Public Service as well as double-digit growth overall in both Europe and the Growth Market. We saw a slight contraction in North America, which reflects some continued pressure in our US Federal business where we expect improvement in the second half of the year.
Finally, Financial Services grew 2% as expected and the trends remain consistent with the last quarter with double-digit growth in Insurance and a slight contraction in Banking and Capital Market. Overall for Financial Services, we saw double-digit growth in the Growth Market and modest growth in North America partially offset by contraction in Europe. We continue to expect improved growth rates in our Financial Services business in the second half of the year.
Turning to the geographic dimensions of our business, I am very pleased that we again delivered strong growth in all three of our geographic regions. In North America, we delivered 8% revenue growth in local currency driven by continued strong growth in the United States. In Europe, revenues grew 6% in local currency with double-digit growth in Italy, France, and Ireland, as well as high single-digit growth in the UK. And we delivered another very strong quarter in Growth Market with 16% growth in local currency led by Japan which again had very strong double-digit growth. We had double-digit growth in Brazil, China, and Singapore as well.
Moving down the income statement. Gross margin for the quarter was 29.2% compared with 28.9% for the same period last year. The market expense for the quarter was 9.8% compared with 10.1% for the second quarter of last year. General and Administrative expense was 6.2% compared to 5.7% for the same quarter last year. Operating income was $1.4 billion in the second quarter reflecting a 13.3% operating margin up 20 basis points compared with Q2 last year.
As a reminder, in Q2 of last year, we recognized a charge related to US tax law changes. The following comparisons exclude the impact and reflect adjusted results. Our Effective Tax Rate for the quarter was 17.1% of the period with an Adjusted Effective Tax Rate of 15.1% for the second quarter of last year. Diluted earnings per share were $1.73 compared with adjusted EPS of $1.58 in the second quarter of last year. This reflects a 9% year over year increase.
DSOs were 40 days compared to 42 days last quarter and 40 days in the second quarter of last year. Free cash flow for the quarter was $1.2 billion resulting from cash generated by operating activities of $1.4 billion net of property and equipment additions of $140 million. Our cash balance at February 28th was $4.5 billion compared to a $5.1 billion at August 31st.
With regards to our ongoing objective to return cash to shareholders. In the second quarter, we repurchased or redeemed 6.7 million shares for $1 billion at an average price of $149.46 per share. As of February 28th, we had approximately $4.5 billion of share repurchase authority remaining. As David mentioned, our board of directors declared a semi-annual dividend of $1.46 per share, representing a 10% increase over the dividend we paid in May last year. This dividend will be paid on May 15, 2019. As a reminder, the beginning of the first quarter of fiscal 2020 we will move from a semi-annual to a quarterly dividend payment schedule.
So, at the halfway point of fiscal ’19, we feel really good about our results to date and our positioning to deliver on our full-year business outlook. We continue to be extremely focused on achieving our financial objectives which are: Growing revenues faster than the market; Delivering consistent, modest margin expansion and strong earnings growth while investing at scale for market leadership and generating strong cash flow, which is both invested in the business and returned to shareholders through disciplined and smart capital allocation.
With that, let me turn it back to David.
David P. Rowland — Interim Chief Executive Officer
Thank you, KC. As I reflect on our second quarter and year to date results, I think they say a lot about the important attributes that truly differentiate Accenture as a market leader. Of course, the overarching headline is the consistency and durability of our strong financial performance which KC described very well in her comments. But I think it is equally important to understand how closely aligned our results are with our strategic priorities because what drives the results is just as important as the outcome.
So, I want to take a few minutes to describe how our results clearly reflect our strategy in action. First, the foundation of our growth strategy is to drive strong moment in the New and that has certainly been the case so far this year with continued double-digit growth across Digital Cloud and Security even as these businesses have reached significant scale and now represent the majority of what we do. With Accenture Interactive, we continue to lead a significant disruption in the market leveraging our position as the world’s largest provider of digital marketing services with award-winning capabilities to help leading brands transform their customer experience. In fiscal ’19, we have invested significantly in this area and have announced six acquisitions so far this year to further enhance our scale and differentiation in high priority markets.
In Applied Intelligence, we’ve also made significant investments to scale the business and strengthen our distinct positioning which combines advanced analytics and artificial intelligence with our deep understanding of industries and business functions. We currently have more than 20,000 people focused on Applied Intelligence, including 6,000 deep in artificial intelligence and data science. We have developed more than 250 proprietaries, industry-specific assets significantly differentiate us in the market. We’re making excellent progress with Industry X.0 which is using advanced digital technologies to help clients transform their cooperation from R&D and engineering to production and aftermarket support. We’re building a market leading capability with more than 10,000 people supporting Industry X.0 and we continue to expand our capabilities in dozens of innovation centers in our global network from Munich to Tokyo to Detroit. We’re also rapidly scaling Accenture Security where we made further progress this year in building a market-leading cybersecurity business. Today, we’re one of the leading providers in this market growing double digits year to date with revenues we estimate will be well above $2 billion in fiscal ’19.
The second pillar of our strategy is Accenture Technology which we believe represents the strongest technology capability in our industry. So far this year, we’ve sharpened our focus on three key areas within Accenture Technology that powered growth across our business. First, you’ve heard us talk about intelligent platform services where we are a global leader partnering with the largest players, SAP, Microsoft, Oracle, Salesforce, and Workday. This business continues to account for about 40% of our total revenues and has grown double digits so far this year.
Intelligent Software Engineering Services is the next area of focus where we are leveraging the capabilities of more than 30,000 engineering professionals to deliver products and custom systems in a time of accelerating technology disruption. We believe the demand for custom cloud-based applications will grow significantly in the coming years and we are well positioned to meet that demand. And with Intelligent Cloud and Infrastructure services, we’re a leading integrator for cloud partners such as Microsoft Azure, Amazon Web Services, and Google Cloud Platform, providing clients with powerful differentiated solutions as they accelerate the adoption of cloud-enabled technologies.
Accenture Operations is the third pillar of our strategy and we continue to lead the market with new and innovative approaches to help clients drive top-line growth and efficient and intelligent operations. During the second quarter, we introduced SynOps, our unique approach to orchestrating data, applied intelligence, and digital technologies with human expertise to reinvent business processes and enable intelligent operations. Accenture Operations has contributed double-digit growth so far this year and in fact, has been a consistent market leader with double-digit growth for 7 consecutive years.
And to complete the picture, we have continued to invest in growing our Strategy and Consulting capabilities which are the foundation of our deep and differentiated expertise. In the first half alone, we’ve scaled key growth areas in Strategy and Consulting with the addition of more than 400 new managing directors through promotions and external hires. I was so delighted that Accenture was recognized just last week among the top companies in the Forbes ranking of American Management Consulting Firms receiving more five-star rating than any other company.
Of course, what makes Accenture truly special is our ability to combine our capabilities across these strategic areas of focus to drive large scale transformational change for our client and you see strong evidence of this in the $22 billion of new bookings we’ve generated so far this year. Underpinning all of these strategic pillars are Accenture’s unique position in the ecosystem, ou